All of the latest news about the real estate market sounds so doom and gloom. Yes, there are mortgage companies that have closed their doors and there are less loan programs available. One of the types of loans that has disappeared is the 100% financing, stated income programs. A stated income program lets someone say, “I make so much money a year”, but the mortgage company doesn’t verify the income. This can truly get a person into financial hot water.

When I began selling real estate 17 years ago, I was taught to sit down with every buyer and discuss their financial ratios. These ratios were very set rules to determine how much house a buyer could afford. The rules were that no more than 28% of your gross monthly income should go towards your housing expenses (that includes the principal, interest, taxes and insurance for your property) and your total monthly expenses should not go over 36% of your gross monthly income. (This includes both your housing expenses and all other short and long term debt. . . car loans, student loans, credit card bills etc.) These ratios helped people to determine what a “comfortable” amount of housing expense they could take on given their income and their existing debts.

Stated income programs allowed buyers to totally disregard these financial ratios and it’s not a bad thing that these programs are gone.