Question: We are under contract to purchase a new home for $288,000. We have very good credit and plan on putting ten percent down in cash and obtaining a fixed rate mortgage for $259,200. We currently have our existing house on the market for sale and we expect it to sell fairly quickly. In order to make a competitive offer, our real estate agent advised us that our offer should not be contingent upon the sale of our home. We were comfortable with this because our down payment is coming from our savings account.

Here's our problem: When we applied for a mortgage, our loan officer said that the automated underwriting system evaluated our application as a "caution" because of a high debt-to-income ratio. Apparently, this ratio is 58 percent because the lender is counting the mortgage on our current residence against us. Now he says that there's nothing he can do because the automated underwriting system rejected the loan. It seems to me that someone over there should realize that as soon as my house is sold, I wouldn't have this kind of debt. Any advice would be appreciated.

Answer: Most areas around the country are experiencing a hot seller's market, meaning there are lots of buyers and few sellers. This makes for a competitive housing market for buyers. Your real estate agent was probably correct in advising you to make a non-contingent offer.

However, your loan officer doesn't appear to be making much of an effort to get your loan approved. For the folks who don't know about debt-to-income ratios, let me explain.

One criterion lenders look at when evaluating a loan application is the ability to repay the loan. Lenders typically use "qualifying ratios" for this purpose. First, they look at the ratio of the new house payment and the applicant's monthly income. As a guideline, the house payment shouldn't exceed 33 percent of your gross monthly income.

Lenders also look at your overall debt load. The "back ratio", as it is called, examines the applicant's total debt in relation to monthly income. This ratio typically shouldn't exceed 38 percent.

Herein lies your problem. Counting your current residence, your back ratio is 58 percent - far higher than what standard underwriting guidelines recommend.

Now let me explain automated underwriting (AU). Fannie Mae and Freddie Mac, the two national investors of home mortgages, have developed a computerized underwriting system that enables lenders to give loan dispositions within minutes after the application is taken. It is a fantastic tool for the American consumer because in most cases it eliminates the dreaded waiting period.

In your case, AU evaluated your application and determined that your current debt load is too high so it spit out a "caution" instead of "accept".

Your loan officer may not know what "caution" means. AU never "rejects" a loan. If AU doesn't "accept" an application, which is akin to an approval, it will spit out a "caution" or "refer". This means AU is telling the loan officer to send the application to its underwriting department for a manual review.

There's a good reason AU does not out-and-out reject loans. It's a computerized system. It merely evaluates, credit, down payment, and debt-to-income ratios. It doesn't know the details of the application. It doesn't know that your excessive debt load is a result of carrying two mortgages - temporarily. It doesn't know that you have a history of carrying very little debt. It just sees that you have a 58 percent debt-to-income ratio.

This is why I think your loan officer is dropping the ball. He should certainly deliver your loan application to his underwriting department so an actual underwriter can see that your situation is temporary. My guess is that most underwriters will approve your application. Also, make sure your lender submitted your application to both Fannie Mae and Freddie Mac. Although both AU systems are good, Fannie tends to accept more applications with higher debt-to-income ratios.

Published: July 24, 2002

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, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.