Is this a good mortgage rate/deal or can I do better.?

Question

I'm trying to buy a 107,900 condo conversion in Madison WI, property tax is roughly 2000. I make 30,000 a year, am single, and have enough in savings pay the 5% down and closing fees. My credit score is a 768 but my debt ratio with the home will be 44%. I have been denied both WHEDA and a VA loan because of this debt ratio. My only debt is my car payment, which is up in 2010. I have been offered a plan with no PMI and 6.75 interest though a local bank. Is this a good deal or can I do better. I'm somewhat wary of this loan officer since he pre-approved me for up to 105,000 in loan amount to get a WHEDA or VA loan, when I was in that mortgage range, he then told me my debt radio was still to high. I had disclosed my debt, saving, income and credit score before I began my house search. My offer has been accepted for the place and I have until Wednesday to get financing, I do have the option written into the contract to extended my financing search up to another week if I choose though. Also I would prefer a fix rate for 30 years verses a 5 year ARM which I know is often a option.

Answer 1

44% ratio is a bit high.  Typically it should be less than about 36%.

Regarding the rate itself (6.75%) seems to be OK, but a little on the higher side.  Your score (768) is great, but you are putting only 5% down, as opposed to conventional 20%.  Choice between 30 years fixed vs. 5 year ARM should depend on what you think about interest rates in the future - hard thing to guess.  But remember, if you plan to refinance in the future, that has an associated cost as well.  Without knowing a lots of other details, my recommendation would be to go for 30 years, especially if you don't have pre-payment penalties.

Now, regarding renting vs. buying, I would strongly recommend buying, if you can somehow make it./

Answer 2

44% is too high a debt ratio. Have you seen the Good Faith Estimate for the loan approval to make sure that there is also no prepayment penalties and that it also includes your taxes?

Frankly I think you are stretching yourself too thin by getting the condo when your debt ratio is so high. The best thing for you to do right now would be to pay off your car loan and then save for downpayment. There are a lot of expenses that comes with a house and a lot of surprises too so you need to have a decent debt ratio so that you can manage the first year of owning a home without breaking the bank. Does this 44% also include home owners insurance?

Once you lower your debt ratio you might get better financing.