STATED OR NOT STATED, that is the question... Remember back in ancient times (2007) when a client did not qualify for a loan due to income it was not a problem. Most investors promoted stated income mortgages. What did that mean? Now I am not making this up. This is how the programs worked and were pushed by Account Executives all over the country. The norm for qualifying ratios is 31/43 (I will get back to this later). Stated loans allowed the client to put down an income without documentation. What this meant is that seniors, on a fixed income like social security, that was getting $2,000 a month could put what they needed to get to the ratios the investor wanted. $4, $5, $6K a month was not uncommon to see. Cashiers at a fast-food restaurant making just over minimum wage now became "Shift Managers" making $80,000 a year and if the ratios still were high we would put them in a Pay Option Arm (now that sounds fancy. Guess I will have to write a post about them soon) that would give them a 1% mortgage for the first year and just raise by a little bit to 9% the following year. With all of the money lost by stated loans I am amazed at times that mortgages are still written today.
Stated income mortgages in there pure sense makes sense. Originally designed for the self-employed (the back bone of our nation) to limit the amount of documentation they would need to provide to obtain financing (due to favorable tax laws most self-employed tax returns would not support the 31/43 rule and as long as home value and credit scores were good the client would not have to provide supporting income documentation. Stated mortgages just got out of control.
Now lets get back to the TV stuff. Because of the craziness of the last five years I have discovered that most consumers don't know the difference between DTI and DVI. Let me break it down:
DTI = Debt to Income - This is you income vs your bills.
DVI = Digital Visual Interface - This connector passes an uncompressed video signal from HDTV receivers and other source devices to your plasma display. You will find DVI connections on most 2004 HD plasma monitors and integrated HD plasma TVs, as well as some high-end DVD players, newer PCs, and HD satellite receivers. See what you lean with my blog. All this time you thought it was just about a mortgage.
So now your thinking "OK, now I know my DTI give me a mortgage!." Before you come into a broker like me let me give you a little more ammunition. By now you know that I like naming things. We call this one "Tony's key to DTI" no, to boring. How about "Dang, Tony Informs?" Get it? DTI.
Ok, part of the interview process is to ask how much you make, right? For this example lets say you make $10 a hour and work a 50-hour week and your have a 401k deduction of $35 a week and your paid every Friday. You tell me $350 a week. Right? No. Lets do some math:
40-hrs x $10 = $400 + 10-hrs x $15 (time and a half) = $150 for a gross pay of $550. You got it! When you figure your income it is in pre-tax dollars. Now you going to tell me that you get social security and they don't take taxes. More good news. Just take your social security amount from your yearly reward statement and add 25% to that number. If your award is $2,000, your grossed up income is $2,000 + 25% = $2,500.
OK, so you still with me? You sure? If not take a deep breath and read it again. Folks, this is really, really important. Real Estate folks, ever get a pre-qualification letter from a broker just to find out you do not have a deal a few weeks later? This is a big reason why. DTI was not calculated right.
Now that were comfortable with your income (if your following that is the "I" part of DTI. Lets work on the "D" part which is the debt. To figure debt start with a fresh credit report:
- List all debts. What your are looking for is the minimum monthly payment and the number of months remaining on the debt
(more good news, if a debt has less than 10 payments left you can eliminate that payment from DTI. One exception is a car lease (it is assumed that if the lease comes due you will be getting a replacement debt). - Verify that all debts are yours. Lets say that you co-signed for a car loan (being a former car dude I refer to that industry a bunch) but you are not making the payments. You will need to provide canceled checks for 12-months from the other party showing that they have been paying the debt. You then can exclude that debt from your DTI
- Check for any student loans not in repayment. If so, you will need to contact the student loan company to find the estimated payment out of deferral (they will send you a copy) if you do not do this you normally have to use a factor of 2% of the loan for a monthly payment.
- Check collection and judgments. If any payments arrangements have been made you will need to factor this amount.
OK, lets go back to our client making $550 a week. When you take the $550 x 52 weeks divided by 12 months our client makes $2,383 a month. For this demonstration lets say that our client has a $250 car payment, $100 in credit card payments and has a collection they have been paying $50 a month. Let's see here, a little quick math, his debts are $400 a month. Wow, they make $2,400 a month and only have $400 a month in bills, this is a no brainier. don't get so excited, were not done yet.
Were forgetting the new mortgage. Lets say the client is looking for a $80k mortgage at 6%. Now we have to add $480 to the $400 right? This is going to be a piece of cake. No again. Need to include a little thing called property taxes, homeowners insurance, and mortgage insurance. Let's call it $120 a month. Well we must be done now. Right? Lets get back to that.
Remember those numbers 31/43 and I said I would get back to them? Well I hope you did not forget because I didn't. The 31 is the threshold percentage for the new mortgage payment while the 43 is the threshold percentage for the total of all debts. Lets see how we came out.
Our monthly income is $2,383 the mortgage PITI (principal, interest, taxes, and insurance - everyone assumes what it means) $600 and monthly bills are $400. So that makes the bottom DTI of $600 divided by $2,383 or 25% and the top DTI is $1,000 divided by $2,383 or 35.3%. So were good. Right? NO, NO, NO. Remember about 3,500 key strokes ago (3,543 if you want to be exact) were our client is having $35 a week going to 401K? I thought so. This also has to get factored. Now $35 a week x 52 weeks divided by 12 is $152. So now our income goes from $2,383 a month to $2,231. What does this do to our percentages? Our top number is now $600 divided by $2,232 or 27%, OK so far and the bottom is $1,000 divided by $2,232 or 45%. "Houston, we have a problem." Now the deal is not "dead" it is just not the automatic deal we had a few paragraphs ago. It is easier and we have a better chance getting the DTI through underwriting if we figure it correct the first time. Not after you get stiped for additional income.
I cannot stress how important DTI is in today's underwriting world. Most homes in foreclosure today are due to stated income or high DTI.
This is just another reason to work with a professional mortgage broker. A professional has been trained and know what to look for. How crushing it is to find the house, jump through all of the hoops, get your hopes up all to be taken away because your broker did not spend enough time to evaluate your DTI. Folks you hired a real estate agent to help you get a house. Make sure you hire the right mortgage professional to be sure that you can pay for it.
Happy Selling and Buying!
Tony Grego - Indiana Mortgage Broker
Quote of the Day:
That's right. 'Tain't yours, and 'tain't mine.
--Mark Twain
(when friend said that a certain rich man's money was "tainted")
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