In calculating maximum allowable loan value for a home purchase, the lending institution will allow a certain percentage of the buyer’s income to go toward housing costs. The actual percentage varies with the loan program, but it is typically 28% or 30%. At additional amount, usually 8% of income, is allowed for payment of consumer debt. If there is little or no consumer debt, some lenders will allow a “stretched” housing ratio: In other words, a bit more of the income can be applied to housing costs than would otherwise be permitted. But if the consumer debt ratio exceeds the allowable percentage, then it will cut into the housing ratio, reducing the percentage of income which can be applied to housing, thereby lowering the maximum loan value.

Dave and Margarete had found a home which would work well for their family. Although the house was small, it was adequate, and was located in a neighborhood with children their daughters’ age. The road was a loop, so the traffic was sparse and moved slowly. Everything seemed perfect, but when they went to the bank, they were told that, because Dave’s credit was less than pristine, they would have to settle for one-year adjustable loan with an unattractive rate schedule.

They had hoped to get a Vermont Housing Finance Agency(VHFA) loan, with below-market interest. VHFA has provided opportunity for many homebuyers including Vermont Governor James Douglas, whose family purchased their first home with a VHFA mortgage. Margarete’s credit was excellent, and if they could have applied for the financing in her name only, there would have been no problem. In fact, her income would have been sufficient, except that the payments on a car loan which was in her name raised her consumer debt obligations to 12% of her income. Since VHFA allowed 30% of income to go toward housing, and 8% for consumer debt, Margarete’s consumer debt ate into the allowable housing debt, so that only 26% of her income could be applied toward housing. This was not enough.

But just as they were starting to get discouraged, the loan officer said: “Wait, I have an idea!” She picked up her phone, and a few minutes later another loan officer joined them. After a discussion, the other loan officer prepared documents, and soon the automobile debt, which had been in Margarete’s name, was refinanced as a personal loan for Dave. This freed up Margarete’s debt ratio, so that the full, allowable, 30% of her income could be applied to the home purchase. It was no longer necessary for Dave’s credit rating to be considered in financing the home purchase, and they were able to qualify for a VHFA mortgage in Margarete’s name alone.

What had seemed to be an unsurmountable problem less than an hour earlier, was now remedied. In retrospect, the solution seemed obvious. As is often the case, the genius of the solution was in it’s simplicity.