December 14th, 2009 2:06 PM by Diego Quintero
If you are planning to refinance or buy a home soon, you may want to think about how to finance your gift giving this year. In a recession, it's easy to fall into the pattern of using credit cards to make purchases when you are in the heat of holiday shopping. But I want all of you to think twice.
In the past few months industry leaders have decided that the default rates on mortgage loans are still unacceptable. Add-in some season spending and you may find yourself in tough position to refinance or purchase in the near future. Banks will deny loans that surpass the forty-five percent threshold on debt to income ratios. A ratio that has been used in the past, but could have been overturned if the borrower had excellent credit scores and/or plentiful assets.
Debt to income ratios are a calculation of monthly income in relation to a borrower’s household debt; like credit cards, car payments, student loans, or mortgages. For example, if a borrower makes $1000 gross income (before taxes) per month and has $300 in monthly payments, then that borrower has a 30% debt to income ratio.
It is simply going to be more difficult to get approved for home loans and if your seasonal spending is done on credit, be careful! The latest trend of credit card interest-rate hikes may take you over the debt to income threshold where the payments reported at the credit bureaus are higher than customary.
Another word of caution when planning your holiday budget is the instability of the job market. These lending changes are taking place, more so, for the banks & mortgage insurance companies to feel more confident investing in residential real estate. Additionally, Shaun Donovan, Secretary of Housing and Urban Development states, “Obviously, foreclosures have proven very difficult to tackle – where they were first driven by subprime mortgages, now job losses are the primary cause.”
When loans are written, jobs and incomes are verified, but with the tumultuous marketplace- no job is safe. Either way, take caution in the holiday spending, it will only hurt your position if you need to make any large financial moves in the future.
On a less personal level, it may make sense to continue tightening lending guidelines, but are we risking the restriction of the velocity of money and further deteriorating the economy? A question to be answered by historians in many years to come.