Financing in 20850>Question Details

Allie, Home Buyer in Silver Spring, MD

my lender could not get the deal done on a 30yr FHA but offered a 3-1 or 5-1 ARM is this a bad idea

Asked by Allie, Silver Spring, MD Thu Jan 28, 2010

Due to a high DTI my lender has suggested I go with a fixed rate ARM and then FHA streamline refinance within a year or so. Is this something you would suggest doing? What could be pitfalls of this scenario?

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In your case you may not not have a choice. If they are stating you were turned down because your total amount of debt is too much for your gross monthly income the arm might help. Please let me exlpain: The short term arms are usually good for one of two scenarios: 1) if you will most likely only be in the house for a time shorter than the fixed part of the arm 2) you expect your income to go up substantially during the fixed period. In your case, the major benefit you are going to get a lower rate. The lower rate will give a lower payment and should help you to qualify if your debt to income ratio is the issue. The thing you need to worry about is what happens after the fixed part of your expires and if rates have really jumped up the way everyone says they are going to. You need to really understand how high your payment could go and be very careful. I would be happy to go over the different products, how they work and your maximum exposure. Please feel free to call me Will Steneman at 410-536-3601.
2 votes Thank Flag Link Thu Jan 28, 2010
Hi, Allie. You can lower your debt to income ratio by paying down some debt or increase your income.
0 votes Thank Flag Link Sat Feb 16, 2013
You've received a lot of answers. And, you are getting some good advice from each response. I still have a few questions for you. Have you checked with more than one lender to see if you have some other options. Many Buyers shop around to see what options they have. In my area (Northeast OH), some of our local banks have some great products, because they portfolio the loans (that means they don't sell the loans to Fannie Mae or Freddie Mac, etc., they keep the loans). How bad is your DTI? Would you be willing to consult with a lender for a plan to reduce your debt over a short time period, & still buy a home while the prices of homes & interest rates are still low (but, that means you would not buy the home you are considering now)? I'm really concerned about your DTI. Could you end up home rich and cash poor?
0 votes Thank Flag Link Fri Jan 29, 2010
Allie, the main pitfalls to follow that advice are 1) the value of your home could appraise for lower than you purchased it in the near term, preventing you from refinancing, & 2) you are going to pay money to get the loan and again to get the refinance.

My noble colleagues have given you plenty of good advice as to why ARMs are not a good idea for a lot of people. That said, there are very good reasons that people choose ARMs to finance rather than fixed. The key here is that it depends on your situation.

Example: couple buys house with ARM because wife or husband will stay at home for 2 years with their newborn child. After two years, their income goes up when both parents go back to work, maybe even doubles, then they can move into a more permanent or fixed rate mortgage.

It you are considering doing this because of your Debt-to-Income ratio, I would advise against it, unless you have some guarantee of debt repayment to put you into a better situation (maybe the first time buyer tax credit)? This could all make perfect sense on paper, but there is absolutelee no guarantee that the loans and requirements used to day will be available in a month. you may find your DTI needs to be even lower, then you're stuck. Again, everything depends on your situation.

Finally, you need to consider if you're ready to buy a house. Sometimes your best investment decision is waiting until you're ready to buy, especially if you risk a future foreclose, bankruptcy, etc which will follow you around for 10 years (not just for loans, but for getting a job). If this is a straightforward DTI issue, pay down your debt first, then save some money for a down payment. You are going to have a hard time being a homeowner if you can't do that.
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0 votes Thank Flag Link Thu Jan 28, 2010
It is a VERY BAD idea.

here is why. You get the loan. Time passes. Interest rates rise, your income does not. in 3-5 years you have to refinance at 10% or more. All of a sudden the house you could afford becomes something you must get rid of to survive.

If you do not think that is possible please consider 2 things.
1We are at almost 0% interest rates form the federal reserve now. Rates can only go up.
2. we have a lot of foreclosures today. Many of them were caused by ARM's adjusting up. You could end up in the same position.

If it was me I would do one of two things.
1 find a lender who would give me a fixed rate loan
2 improve my credit and financial resources until I could get a fixed rate mortgage.
0 votes Thank Flag Link Thu Jan 28, 2010
I highly recommend sticking with a 30 year fixed and staying away from an ARM, especially if its for the purposes of getting qualified for more home then you can actually afford. It sounds like the house may be too much for your income. I recommend buying the interest down, putting more down payment on the purchase, looking for a lower priced home that fits your budget, or possibly getting a co-signor if it makes sense.

FHA allows non-occupant co-borrowers. This is a great option if it makes sense. Rates are low right now and most experts say they are going to rise this year. So, while you may be able to refinance, the rates may not be in your favor.
0 votes Thank Flag Link Thu Jan 28, 2010
Well said Happy Mortgage.
0 votes Thank Flag Link Thu Jan 28, 2010
Um No. You have to be careful with this scenario because FHA will qualify you on the rate plus 1% on the 3/1 ARM. So, you're right back where you were on the fixed rate loan. To refinance, you'd have to wait at least 1 year, but probably about 3 years to avoid paying fees out of pocket (value may not go up enough to cover the costs). I'd look more towards finding ways to increase your income or reduce your debt: Have you had your job for over 2 years? If so, is there overtime or bonus/commission income to use? Are you receiving additional income (child support/alimony)? Do you have any student loans that can be deferred for a year? Do you have any installment loans (financial companies) that have less than 10 payments left? Are there any credit cards you can afford to pay off? Are the taxes correct? Can you get a lower home owner's insurance payment? Last resort, can you get a co-signer? Stay away from the ARM. This might be an attempt to get another loan from you in the future and cost you another couple of thousand dollars refinancing.
0 votes Thank Flag Link Thu Jan 28, 2010
It is a great possibility that the ARM might be better. Please call my Finance person on 202-255-4451. He's the best person to answer your question.
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0 votes Thank Flag Link Thu Jan 28, 2010
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