Wednesday, July 1, 2009

Getting Closer to a Preapproval!

Ok so we left off last time at the minimum credit score needed to qualify for a loan. Now we are going to look at some other factors taken into consideration in order to qualify.

Your loan officer has already pulled your credit and they are looking at the report not just for your credit score. They also want to see your monthly debt load in order to calculate your debt to income ratio. Now what is a debt to income ratio you might ask? It is a comparison of your monthly liabilities to your monthly gross income.

To calculate your debt to income ratio, add up the monthly payments you pay on everything. When I say everything let me clarify what I mean. I am talking about monthly liabilities that are reported each month on your credit report. These are items such as car payments, minimum payments on credit cards, loan payments, other mortgage payments, home equity line payments, and student loans. Student loans are a little tricky. The last time I checked the guideline if they are in deferrment for two years or more (and you can provide the documentation to show this), then you do not need to include the payment. If the student loan is deferred for less than two years, than it would need to be included in your ratio. Please do not forget above everything else listed to include the proposed mortgage payment, including taxes, insurance, and homeowner's association dues.

Once you have the total of all your monthly liabilities, you are going to divide that dollar amount by your gross monthly income. If there is going to be more than one person on the loan, please add up each person's liabilities together, take that total and divide that by the total gross income of all parties. Now you once you have divided those figures, you (hopefully!) get a decimal figure under .45 or 45%. That is your debt to income ratio! Underwriters on the conservative side do not want to see a DTI over 43%, with good compensating factors you can go up to 45%. Back in the mortgage heyday you could go up to 50%! But those days are pretty much gone.

Now we just calculated your back end debt to income ratio. Underwriters also look at your front end ratio, which is also known as your housing ratio. This is calculated by taking the proposed mortgage payment and dividing that by your gross monthly income. This ratio is not weighted as heavily as your back end ratio, but is still taken into consideration.

Please note I know it is easy to say get your gross monthly income, but I know that most people have different variables that go into their pay including bonuses, commission, tips, and overtime. To be on the conservative side, you can start out with just your base salary. Now if your base salary alone does not get you to a ratio under 45% and you do have overtime and bonus, underwriters will be a little reluctant to use that to help out your ratios as that is not guaranteed income. They calculate any bonus or overtime over a two year average. If you have not been in your current position for two years, bonus or overtime will probably not be calculated for debt to income ratio purposes, but more likely viewed as a compensating factor.

Now I just brushed on the topic of borrowers on a commission structure. If 25% or more of your pay comes from commission, you will be viewed more like a self employed borrower. What this means is that you will need to be employed in your current commissioned position for at least 2 years (once again so underwriters can get an average pay figure), and also be ready to hand over your last two years tax returns.

Self-employed and 1099 borrowers are going to have an even more difficult time. Be ready to hand over EVERY SINGLE page of the last two years tax returns, along with profit and loss statements, and all accompanying schedules of your tax returns. That is just the minimum of what the underwriter can ask of these borrowers, be prepared, because they will probably ask for quite a bit more!!

So we covered some more information and you are getting that much closer to getting preapproved! I am going to take a break and enjoy the holiday weekend by the pool and watch some fireworks, so Happy Fourth everyone!!