How inappropriate loans can lead to bankruptcy

Dear Ms. Mortgage Maven,I make about $70,000 per year working two jobs. Twelve months ago I was approved for a $200,000 purchase. I could not find anything I liked in my price range. Six months ago I went to an open house with a realtor and fell in love. It was $442,000. I got a 100% financed loan through a well-known national lender, who allowed me to finance the closing costs in the loan amount. My loan amount is about $454,000 at 9.375% interest. My mortgage payment is over $3,700 and my taxes and insurance are over $600/month. (I just got a $3,000 tax bill and do not have the money to pay it.) I have a two-year adjustable rate mortgage but the mortgage payment is too high and I would like to lower my interest rate. I have no money left in my checking or savings.

Thanks.

No Name Please

Dear NNP:

I have heard lenders justify making inappropriate loans to customers, loans they know the customer cannot afford, by saying, "if I do not make the loan, the borrower will just find someone who will and that person will get the commission". Well, congratulations, you found that lender who cares about his (or her) commission and not the well-being of the customer. If you spent any amount of time with the realtor, and the realtor knew your salary, then I do not understand why - or how - that realtor could show you houses so wildly out of your price range. Oh wait - that person was also paid by commission.

Your current mortgage payment (including property taxes and insurance) is a little under 74% of your gross income. The remaining 26% has to cover your income taxes plus your living expenses. Do you know what your tax rate is? I am not a tax expert, but even if your tax rate is a low 18%, that gives you 8% of your income, or $5,600 for the year, to cover every drop of gas, loaf of bread, pair of shoes, etc. That is just not realistic. And if it is higher than that - 100% of your income (or more?) would be spent on just your mortgage payment and taxes.

You must have gotten a stated income loan. Although stated income loans were designed for the small business owner whose self-employment status did not fit neatly in the full documentation loan box, stated income loans are available to wage earners. And I will acknowledge upfront that stated income loans are known as "liar loans" in the industry, but the situation you got yourself in is extreme, in my opinion. The house you bought is almost two and one half times the purchase price the first lender qualified you for. What happened?

You are in a difficult situation. You have a "jumbo" loan (over $417,000); you financed the closing costs so you may owe more than the property is worth; you no longer have any "reserves" for a refinance application; and you would have to state your income (and your assets). And since you have no money to pay for the costs of refinancing, you would have to hope that your home has increased in value so you can use the equity to pay for the refinance.

Assuming it is even possible to refinance, how much good can it do? If you lowered your payment to 8%, the monthly payment would be onikly $432 less per month, less than your monthly tax bill of $500. You would now be spending 67% of your income on your principle, interest, taxes and insurance. Will that help you keep your house? I do not see how that will make a substantial difference in your financial situation.

You told me on the phone that your lender knew your true salary. While I think the lender deserves a lot of blame, you are the one who signed the loan documents with what I can only assume was a completely fictional income, and you are the one left holding this bag, while you can, anyway.

Next week, I will outline some alternatives to you. Best of luck,

Jessica White, also known as "Ms. Mortgage Maven," is a mortgage consultant with Tenacity Mortgage, a division of Tenacity Group, the Capital Region's leading financing, real estate advisory and tenant condominium-conversion company. Call her with your questions at (202) 607-4449 or email her at Jessica@msmortgagemaven.com. You can also apply online at www.msmortgagemaven.com.