Debt To Income Ratio And Your Mortgage
By Kevin Phillipson
In the turmoil of the financial market today, what does it take to get approved for a home loan? Most people I speak to have no idea if they can qualify for a loan, let alone have any idea of what the underwriters are looking for. The programs have not changed significantly, we still have VA, FHA, Conventional, Reverse and USDA loans, however the requirements of each of these loans has substantially changed.
Would you qualify today if you applied for a home loan, whether to refinance or purchase? The Mortgage Ready program was developed 3 years ago in response to these market changes. Contrary to popular belief, credit scores are not the most common reason seen lately for not being qualified – Debt to Income ratio is, followed very closely by home value as it affects the Loan to Value ratio. Credit, work history and available assets are also factors that influence the approval process.
What is meant by Debt to Income ratio, and how has that changed? Most guidelines require a Debt to Income, or DTI of 42% or less for your total Debt to Income ratio, which means all of your debt; cars, credit cards, personal loans and mortgages cannot be more that 42% of your gross monthly income. Not your take home income, but the gross, before all taxes and deductions. A common issue today is a loan against your 401k, these loans reflect on your paystub as a deduction; however they do not appear on your credit report, so when calculating your debt to income ratio this must be added to the monthly payments and thereby lowering your DTI ratio.
Another huge issue today regarding income is self-employed people documenting income. Most self-employed business owners have taken significant losses in the last 2 or 3 years. When applying for a loan, if you show your income as anything but W-2 salary or wages you will be evaluated as self-employed, meaning if you are a commissioned sales person, whether full commission or base plus commission, you are self-employed from an underwriting stand point, and an average of the last 2 years income is used to qualify. Now if you are like the average commissioned person, you had terrible years since 2008. The number used is complicated at best – it is the adjusted gross income from your tax return, plus an array of add backs such as depreciation and home use as office; however all those deductions you took for mileage, supplies and so on have lowered your income and are not taken into account. You may be paying your bills, including a $1,500 mortgage, car payment of $400 and so on, but only show an adjusted gross income of $30,000. The ratio is not a true reflection of your real income. The IRS wants you to pay taxes on all income, and they want you to take the allowable deductions, but if you do, you won’t qualify for a loan, but if you don’t refinance and take advantage of the low interest rates, you won’t be able to afford to keep paying your mortgage much longer. A catch 22, show more income, pay more taxes, don’t take the deductions you deserve and are entitled to, just so you can lower your interest rate from 6.5% to 4%. On a $250,000 home loan that represents a $386 a month savings in cash flow – hard choices, sometimes impossible.
Credit score is a significant issue for many people, with so many people not being able to refinance because of situations like we just covered, or loss of income due to unemployment or underemployment, or just from the rising cost of living and the lack of pay raises. Maxed-out credit cards can lower scores by as much as 100 points, without any 30 day late payments. You can be paying the minimum on all cards, never have gone more than 30 days late and have a score in the low 600’s, not qualifying for a refinance. Qualifying could mean saving that $386 each month that could go toward paying down or paying off some of those credit card balances and returning your credit score to the 700’s.
What do you do, if you can’t qualify to refinance – you won’t be able to keep paying your cards, and one issue, doesn’t even need to seem major, like needing new tires for the car you need to get to work in, and now you have to choose: card payment or tires, card payment or kid’s clothes for school, card payment or food, card payment of electric bill, card payment or gas to get to work ……..
When things seem hopeless, and so many questions go unanswered, getting a Mortgage Ready evaluation would be a great idea. The process is simple, a 30 minute conversation to gather information and in 24 hours or less you will have a written game plan to start the process toward qualifying. Mortgage Ready can take as little as 5 minutes or as long as 18 months, but you will have a plan to work from and a coach to guide you. Ultimately you will know what an underwriter will require, whether you need to purchase, refinance or just get a handle on what may seem to be a nightmare.
Mortgage Ready is an education process that simply helps you make sense of where you are today and lays out a plan to assist you with moving from where you are to where you need to be to get qualified.
For your evaluation, please call me, Kevin Phillipson at 302-264-9094 and let me guide you.
My wife and I wanted to drop you a note to say thank you for all your help in re-financing the house. We went through a couple of different companies and they could not get the job done. You on the other hand were relentless and made it happen. I know we did not make it easy on you but somehow you were able to get it done. Your service was outstanding and I would recommend you to anyone. Thanks again ~Matt and Colleen, Columbia MD
I would like to thank you and your dedicated team for all of their hard work and dedication to help me achieve my goals of financing my home. My financial situation wasn’t the best due to a divorce after many years of marriage, left with reduced income, and many bills and 3 children to raise; 2 of them in college. I struggled for close to 2 years to maintain and needed to find a way to get ahead. You showed me a way to consolidate outstanding debts and to elevate my financial strains so that I could maintain the residence for my family. The process went smoothly considering. My financial situation is improving and I owe a huge thanks to you and your team for helping make my dreams possible. ~ Karen, Camden DE
Thank you for all you have done for me. It gives me a 2nd chance at life. Each spring I will toast you and bless you for what you have done for me. ~ Tommie, Rehoboth Beach, DE
We have averaged a 98 point increase in credit score in 121 days since April 2009. 85% of those that complete all stages and recommendations in the process qualified for a loan.