If you qualify with an ARM but not
an FRM, it means that with the FRM you exceed the maximum allowable ratio of
your housing expense to your income, or your total expense to your income.
Housing expense is the sum of the mortgage payment including mortgage insurance,
hazard insurance and property taxes, while total expense is housing expense plus
monthly payments to service your existing debt. Typical maximum ratios are 28%
and 36%, respectively.

Maximum expense ratios actually
vary somewhat from one loan program to another. Hence, if you are only
marginally over the limit, nothing more may be required than to find another
program with higher maximum ratios. This is a situation where it is handy to be
dealing with a mortgage broker who has access to loan programs of many lenders.

Maximum expense ratios,
furthermore, are "guidelines", not absolute limits. The following are
some circumstances where the limits may be waived.

- The borrower is just marginally
over the housing expense ratio but well below the total expense ratio �
29% and 30%, for example, when the maximums are 28% and 36%.

- The borrower has an impeccable
credit record.

- The borrower is a first-time
home buyer who has been paying rent equal to 36% or more of income without
any problems.

- The borrower is making a large
down payment.

If it is not possible to raise the
maximum acceptable ratios in any of these ways, it may be possible to reduce *your
*ratios -- provided you have planned to make a down payment larger than the
absolute minimum. You can use the cash that would otherwise have gone to the
down payment to reduce your expense ratios by paying off debt, paying points to
reduce the interest rate, or funding a temporary buydown.

The first two approaches will work
only in a small percentage of cases, however. For example, paying an extra 2.625
points to reduce the rate from 7% to 6.375% will reduce your housing expense
ratio by about 1 percentage point. This assumes, furthermore, that the reduced
down payment does not push you into a higher mortgage insurance premium
category, which would offset most of the benefit.

Using the extra cash to pay off
debt will work only if a) you exceed the maximum total expense ratio but not the
maximum housing expense ratio (your ratios are 27% and 38%, for example, when
the maximums are 28% and 36%); and b) your existing debts have short terms and
high rates. For example, if you increase your loan by 2.6% and use the increase
to repay debt, and if the debt has an average rate of 15% and is being repaid
over 5 years, you would reduce your total expense ratio by about 2 1/2
percentage points.

Much the most effective way to
reduce both expense ratios is to use a temporary buydown. Assuming a market
interest rate of 7% on a 30-year FRM, an increase in the loan amount of 2.5%
will fund a 2-1 buydown, where the payment is calculated in year one at 5% and
in year 2 at 6%. This would reduce your expense ratio in year one by about 4 1/2
percentage points.

Read What Is a Temporary
Buydown?

Copyright Jack Guttentag
2002