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Posted On: 11/26/2008

Q:About three years ago we bought a new home. The house is great, but to get the financing we used a stated-income

loan application. When the lender asked how much we made our estimate included some overtime pay that we had gotten in the past.

The problem is that as the economy has slowed our overtime money has disappeared. At the same time, we now face much higher monthly payments then when we bought the house.

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We can't sell because the value of the home has dropped, and we bought with almost nothing down. We can't stay because the payments will drive us into bankruptcy. We've begun taking money from credit cards to cover the monthly shortage. What can we do?

A: If all the stars were properly aligned your purchase could have worked -- but only if your income continued, monthly costs remained constant and home values rose.

This transaction was a dud from the start. You had to stretch to afford the property, meaning there was a lot of risk for you -- and the lender. You used a stated-income loan application. This conveniently allowed the lender to charge a higher rate because you did not or could not document your income.

The most appalling aspect of this situation is the use of credit card advances to make your monthly mortgage payments. There is no possibility that this will turn out well. Credit card debt is unconscionably expensive and the interest is not generally tax deductible

What to do? You can't sell and and you can't stay -- unless you get more income. Get a part-time job at night or on weekends. Take in a boarder. If you're making car payments, trade down. Sell the car for something safe and cheap.

If you have been making payments in full and on time then look into refinancing with an FHA loan. Look into the FHASecure program and the "Hope for Homeowners" loans made possible under the FHA reform package passed during the summer.

Q: I'm refinancing my home. The lender insisted on a full appraisal of the property and the appraisal showed that my home was worth more than expected. Why would a lender come in with such a generous appraisal?

A: The appraiser evaluated the property in the context of recent sales of similar nearby properties. The appraiser wasn't generous or unkind or anything in between, rather the appraisal report simply reflected local home values and trends as seen by an independent expert.

You're actually lucky. Imagine if the appraisal came in below your estimated value. In that case the lender might have been willing to only make a smaller loan -- or perhaps no loan at all.

Q: I'm a real-estate broker. I had a buyer who refused to provide any financial information, asking "Why do you need to know how much I can afford?" What would you have told him?

A: As a real-estate broker you cannot suggest properties without knowing something about the buyer's financial capacity. It's a waste of your time -- and the buyer's -- to go forward without such information.

What to do? The buyer could get a pre-approval letter from a lender, providing the lender at least runs a credit report. Or, you could explain to the buyer that he or she would have a better chance of getting an offer accepted if they can use a lender's letter to show a seller that financing will not be an issue.

It may be that the buyer has privacy concerns. Such concerns are not unwarranted or unreasonable, but the dull reality is that to buy real estate purchasers must disclose their financial position unless they're able to pay in cash.

Q: I spoke to a lender about getting a mortgage and later applied for a loan. I want to borrow $150,000, but the lender says I qualify for $175,000. This makes no sense to me. Why is the qualifying amount higher than what I can realistically afford?

A: Lenders have traditional guidelines that suggest what's affordable based on your income, credit and monthly costs. The lender might say that as much as 38 percent of your gross monthly income can go to housing costs, auto payments and other expenses. That's fine and such guidelines likely work for most borrowers.

But if you're not comfortable with such high levels of debt then say so. Look for properties where the maximum loan amount will be no more than $150,000. This is your decision, not the lender's. The good news is that you should have no trouble getting the loan of your choice.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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