THE ADVANTAGE
Your monthly recap of the most important
mortgage-related news, perspective, and advice
March 2023
3 minute read
Shining brightly amidst the silver lining found in the aftermath of the 2008 housing market crash is the fact that everyone (the government, mortgage lenders, home sellers and buyers) started to take mortgage affordability very seriously.
There are multiple ways to answer the question “How much home can I afford?”
Members should always weigh all the costs of buying a home—such as maintenance, upkeep, utilities, and new furniture—against their future financial goals.
We cover those aspects more fully in this Learning Center article, but for now let’s understand how a lender would answer this question.
Three Important Ratios
Lenders analyze three ratios to get a better understanding of a member’s finances as it pertains to their desired mortgage.
The first is their Debt-to-Income Ratio (DTI), which is found by adding together all their monthly debt, divided by all pre-tax income, and multiplying by 100 to get a percentage. Lenders usually want to see DTI ratios under 43%.
The Housing Expense Ratio is calculated similarly, by adding the monthly principal, interest, taxes, insurance, and homeowner’s association dues—and dividing that number by pre-tax monthly income, and again multiplying by 100 to get a percentage. Lenders like seeing that a member’s total monthly housing expenses are less than 29% of their income.
Finally, a member’s Loan-to-Value Ratio (LTV) tells the lender how much financing the homebuyer requires. A borrower who pays a 20% down payment out of pocket would have a LTV of 80% because they would need to borrow 80% of the value of the home. An LTV of 80% or lower typically doesn’t require mortgage insurance, depending on the type of mortgage.
Affording the Principal and Interest
Principal and interest paid are impacted by various factors.
The interest rate bears the greatest impact. The higher the interest rate is, the higher the monthly mortgage payment becomes.
The mortgage term, or length of time over which the loan is repaid, also impacts the payment significantly. Longer terms translate into lower payments, with a higher total amount of interest paid. Shorter terms will save the homebuyer on interest in the long run, but they’ll have higher monthly payments.
Affording Out-of-Pocket Expenses
The down payment also impacts how much the member has to borrow. Saving for a down payment can take years for some. Although it may be difficult, a larger down payment will typically result in a lower monthly payment, as the borrower will need less financing to purchase the home.
Closing costs usually range between 3% and 6% of the purchase price of the home, and are due at closing along with the down payment. Members need to keep these figures in mind when thinking how much home they can afford.
Confusion Is the Only Thing No One Can Afford!
While all these figures and ratios may be complicated or confusing to your members, they’re crystal clear to us. We’ve helped thousands of credit union members secure financing for a mortgage, so we fully understand the questions and concerns they’re likely to have.
We have various mortgage options available—each one impacting how much home a member can afford.
Please reach out if you or a member needs additional clarity about anything discussed here, and be sure to check out our Mortgage Payment Calculator to help members figure out how much home they can afford.
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Who Is MAM?
Member Advantage Mortgage (MAM) is a Credit Union Service Organization (CUSO) that helps credit unions increase revenue by offering mortgage solutions to their members.
We achieve this by finding the mortgage solution that is in each individual member’s best financial interest.
What We Do
Since 2006, MAM has offered first and second mortgage origination and fulfillment services to credit unions. We also provide marketing tools (like our Mortgage Payment Calculator) to increase lead generation.
How We Can Help You
We’ll help you improve member satisfaction and deepen member relationships by offering or streamlining your mortgage delivery process. You’ll be able to serve current members so they don’t need to turn to the competition, all while increasing your mortgage revenue and generating non-interest income.
How You Can Learn More
This page goes into greater detail on exactly how we provide support and partner with credit unions.
You can also call Del Smith, our Senior VP of Business Development, to get answers to any questions about partnering with MAM.
Disclaimer:
This information is solely for credit union and mortgage professionals and should not be distributed or provided to consumers or the general public.
Member Advantage Mortgage LLC (MAM) is a subsidiary of CUSO Development Company (CDC), which is owned and operated by credit unions for the benefit of credit unions and their members. Member Advantage Mortgage, LLC NMLS #1557. Visit www.nmlsconsumeraccess.org for complete licensing information.