how to qualify borrowers / mortgage calculations · how to qualify borrowers / mortgage...

HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS

WHAT CAN I EXPECT TO LEARN ABOUT QUALIFYING BORROWERS

• What determines the final interest rate on a loan

• Calculation of Basic Income

• LTV (Loan to Value Ratio)

• PITI payment breakdown (What else goes into PITI?)

• DTI (Debt to Income Ratio)

• FICO Credit Scores

• Sample Borrowers


WHAT CAN I EXPECT TO LEARN ABOUT QUALIFYING BORROWERS

Although some of the things we go over today may seem basic in nature, please understand that it is necessary to building the correct

foundation for this class.

You may actually be surprised by some of the incorrect answers today!

Let’s all agree to just have some fun while we learn!


1st IMPORTANT QUESTION

What determines the FINAL interest rate on any loan?



Usually I will hear answers like:• Credit

• Down Payment

• Income

• Etc……


1st IMPORTANT QUESTIONLet me help you a little

It’s a four-letter word that with the letter K

____ ____ ____ K

Be CAREFUL what you are thinking!


1st IMPORTANT QUESTION____ ____ ____ K

Here are some guesses I have received over the years:

LUCK

DUCK

BANK

401 (K)



Still need a little help?

____ I ____ K




____ I S K




R I S K



Please write this down or internalize it. It may seem basic, but it is the foundation of all lending.

The HIGHER the RISK the borrower presents to the lender the HIGHER the RATE will be.


2nd IMPORTANT QUESTION

What are two of the most important factors when qualifying a borrower?

Income and Credit



Think of Income like this:

What is the borrowers ABILITY to REPAY

Think of Credit like this:

What is the borrowers WILLINGNESS to REPAY

REVIEW QUESTION #1



These two items are fundamental to this class.

We will start with basic Income calculations.


INCOME CALCULATION #1Without using a calculator please answer the following question by shouting out your answer.

A borrower gets paid $6,000 every other week.

What is this borrowers monthly income?


INCOME CALCULATION #1Be HONEST…..

Did you say $12,000 a month?

That would be an incorrect answer.

It’s an answer that is given by MANY students.


INCOME CALCULATION #1The correct answer is:

$13,000 a month

Here’s how the underwrites work it out.


INCOME CALCULATION #1

$ 6,000

X 26 (paid EOW is 26 paychecks)

$ 156,000

12 (Months in a year)

$ 13,000 per month Income


INCOME CALCULATION #1It may seem insignificant but let’s see

what impact it makes to the borrower!

A difference of $1,000 a month in income (assuming we could use it all – and we can’t) on a 30 year fixed rate loan at 5% interest would give the borrower an additional $186,281

in loan amount.



We have a borrower with the following income and work hours:

40 Hours a week at $40 per hour pay.



INCOME CALCULATION #2We have a borrower with the following income and work hours:

40 Hours a week at $40 per hour pay.


Correct answer is:

$6,933

I can not tell you how many people answer $6,400. (No Joke)


INCOME CALCULATION #2Although the above calculations seemed basic and simple to calculate here are a few calculations that start to be a little more challenging:

Let’s use the same borrower but this time they also work an additional 20 hours a week OT at a pay rate of 1.5

What is the TOTAL monthly income?


INCOME CALCULATION #2Correct answer is:

$12,133

OT pay is at $60.00 per hour. 20 hours a week = $1,200 x 52 = $62,400 / 12 = $5,200 + $6,933 = $12,133



We have a borrow who receives $4,000 a month in NON-TAXABLE income. How much do we use to qualify this

borrower?


INCOME CALCULATION #3Answer:

$5,000 per month

Why? Because we are able to GROSS up NON-TAXABLE income in many cases. (15% and 25% depending on

underwriting guidelines)



What about self employed borrowers or borrowers that own properties?

Many self employed borrower’s and property owners reduce their taxes through write-offs.



When mortgage lenders review these type of borrowers income we are allowed to add back into the income many

write-offs such as interest paid on mortgages.

Let’s say we have a borrower who earns $150,000 a year but has reduced his taxable income to $90,000. We may be able to add back $20,000 and qualify this borrower on $110,000

instead of $90,000.

REVIEW QUESTION #2


LOAN TO VALUE (LTV)

LTV calculations are an important factor in mortgage lending as they can add to the risk level of the loan and therefore add additional costs to the borrower. Not only can the interest rate be higher, but on conventional loans their may be the added cost of monthly PMI (Private mortgage Insurance) added to the monthly PITI payment.


LOAN TO VALUE (LTV)

LTV is a simple calculation but is important on EVERY mortgage loan. Most lenders are comfortable with the risk an LTV of 80% or less.

Let’s look at a few examples on the handout.


LOAN TO VALUE (LTV)LTV is calculated by dividing the Loan amount by the Value of the property. LTV is nothing more than a RATIO expressed as a %

L

V

The value on a purchase that lenders use is determined how?

The answer is on the next slide!


LOAN TO VALUE (LTV)LTV on a purchase transaction is the LESSER of the Appraised value or the Purchase price.

This helps avoid fraud.

For refinance transactions lenders use the Appraisers value.


LOAN TO VALUE (LTV)


LOAN TO VALUE (LTV)Let’s calculate a few examples on the handout. You have three homes with different values and different loan amounts. Please write down the answers to all three examples. I will give you a couple of minutes.

REVIEW QUESTION #3


PITI EXAMPLEIt’s important to know the total PITI payment before we can move onto any DTI (Debt to Income) calculations.

Therefore it’s important to understand WHAT goes into a PITI payment.

Can anyone tell me what can go into a complete PITI payment used for mortgage calculations?


PITI EXAMPLE

If you said Principal Interest Taxes & Insurance you are on the right path but there is MORE that could be added in some cases.


PITI EXAMPLE

For example, if this borrower had an LTV greater than 80% on a conventional loan they may be required to pay a monthly PMI insurance. If they are taking an FHA loan they are 100% paying MIP (Mortgage Insurance Premium).

In ADDITION… there may be more……


PITI EXAMPLE

If the borrower is purchasing a Condo or Co-Op they will also have a HOA Fees (Homeowners Assoc. Dues) or CAM Fees (Common Area Maintenance Dues).

If a borrower has any of these fees, many times their Insurance and / or Taxes may be included in that fee and we would NOT double count that against the borrower.


PITI EXAMPLELet’s create a complete PITI payment for the following borrower:

Borrower is buying a single family home. They have $50,000 they can use for a down payment. They purchase a home for $500,000. Their loan amount (sans closing costs to keep it simple) would be $450,000. It’s for 30 years fixed rate at 5%. Assume Taxes of $12,000 a year and H/O Insurance at $1,200


PITI EXAMPLEFor this borrower the PITI would be worked out like this:

Principal & Interest P $ 2,415

I

Real Estate Taxes T $ 1,000

Home Owners Insurance I $ 100 (Flood Insurance would be added here if needed)

PMI / MIP (if needed) $ 300 (I just made up the $300 as an example)

NO HOA or CAM in this example -------

TOTAL PITI Payment = $ 3,815


PITI EXAMPLE

Later in class I will create a borrower with income, job types, home purchase, credit report, etc. and I will walk you through the qualification process from start to finish.

REVIEW QUESTION #4


PITI EXAMPLE WORKSHEET


PITI EXAMPLE WORKSHEETThe PITI example worksheet is just a sample of what we look for with every loan. I use this worksheet to train loan officers how to calculate different parts of a payment. We will not be using this document in it’s entirety at this class.

We will quickly calculate the first three examples to give you an understanding of why I do this. The rest of the examples are there in case you want to work them out on your own.


DTI (DEBT TO INCOME) RATIO

Now that you see how these calculations are completed, let’s hop over to the next calculation in the qualification process.

DTI (Debt to Income) Ratio


DTI (DEBT TO INCOME) RATIO

DTI calculation is the same as we do for LTV.

Borrowers Monthly Debts D(There is a Front End and a Back End Ratio to consider) _____

Borrowers Monthly Income I


DTI (DEBT TO INCOME) RATIOFor DTI calculations lenders consider what they call:

Front Ratio / Back Ratio

Housing Ratio / Debt Ratio

Top Ratio / Bottom Ratio (only used by Caylx Point LOS)


DTI (DEBT TO INCOME) RATIOFront Ratio / Back Ratio


Top Ratio / Bottom Ratio

No matter what the terminology, all these terms mean the same thing. I will explain on the next slide.



Housing Ratio / Debt RatioTop Ratio / Bottom Ratio

Front Ratio means the same as if I said Housing Ratio or Top Ratio.

Back Ratio means the same as if I said Debt Ratio or Bottom Ratio




Top Ratio / Bottom Ratio

The most common terminology used in the industry is a combination of Front / Back / Debt… so if you hear these terms you will know what we are talking about!


FICO CREDIT SCORESMortgage companies across the USA all use the same FICO Score Model 8 at this time. This keeps everything fair and equal for all borrowers.

BUT… All FICO and Credit scores are not the same.

Other companies and the FICO company offer different score models.


FICO CREDIT SCORESRemember this saying……If it’s not a FICO score…. It’s a FAKE-O score!

FICO scores range from 300 to 850. Other scoring models have ranges from 250 to 900!

Although we will lend to scores as low as 580 an acceptable starting score is 640, a good score is 680 and a great score is over 740.


FICO CREDIT SCORESObviously the lower the credit score, the higher the risk.

The higher the risk, the higher the rate.

Let’s make up an example borrower and then figure out the LTV / DTI / PITI payment. Remember, this is just an example.

REVIEW QUESTION #5


Example Borrower1) Married Couple (Could be ANY two people or more buying the home)

2) Work: He is a UPS Driver / She is a RN Nurse

3) Income: He earns $85,000 no OT / She earns $125,000 no OT

4) Money saved for down payment (I’m saying they have addition funds for closing costs, buy furniture, etc.)

$100,000 Down Payment Money

5) Price of home they make an offer on: $850,000 for a two family home

6) Taxes on property: $2,400 per year

7) Insurance on property: $1,800 per year

8) FICO scores: His middle score is 680 and Her middle score is 720

9) Rental Income: $2,500 per month

10) Total monthly debts (credit obligations) = $6,500 per month


Example Borrower

Since we know that they both have decent credit scores they MAY be qualified for a conventional loan rather than an FHA or Sub-Prime loan. Nothing wrong with an FHA or Sub-Prime loan but if a borrower qualifies for a conventional loan it’s usually at a lower cost and rate.


Example BorrowerFirst, let’s calculate their income. Since they both have paystub jobs this is an easy calculation.

We add their incomes together and divide by 12. Calculation looks like this:

$85,000 + $125,000 = $210,000 / 12 = $17,500 per month

Next we look at the estimated PITI payment


Example BorrowerIf the home purchase price is $850,000 and we deduct the $100,000 down payment they will need a mortgage for the remaining $750,000.

$750,000 Loan Amount – 5% Interest Rate - 30 Year Fixed Rate

The P&I for this loan is: $ 4,026.16


Example BorrowerLet’s determine the LTV on this property:

Let’s assume that the appraiser comes in with the same value as the offer price of $850,000. With a down payment of $100,000 the mortgage is $750,000.

$750,000 / $850,000 = 88.24% or 89%


Example BorrowerLet’s put together the entire PITI payment based on what we know.

Principal & Interest = $4,026

Taxes = $ 200

Insurance = $ 150

PMI (not accurate) = $ 375 (Based on LTV and Credit score)

TOTAL PITI Payment = $4,751


Example BorrowerDifferent loan products have different underwriting guidelines. These guidelines come from lenders investors such as Fannie Mae / Freddie Mac / Ginnie Mae / etc.

Let’s say that the conventional loan we want to put the borrowers into has a DTI ratio maximum of 45/50


Example BorrowerWhat does a DTI of 45/50 mean?

Remember when I used the terms Front End / Back End Ratio

For this loan the 45 in the DTI is the maximum % of the borrowers’ monthly income.

In this case, the borrowers’ monthly income is $17,500

45% of $17,500 = $7,875 (Max they could pay for front end)


Example Borrower45% of $17,500 = $7,875 Maximum Front or Housing Expense

We calculated a PITI payment of $4,751

$4,751 PITI / $17,500 Monthly Income = 27.15% or 28%

28% Front End DTI on this loan is GREAT (way below the 45% Max)

Now let’s look at the backend RATIO


Example Borrower50% of $17,500 = $8,750 Maximum Back or Debt Ratio

For the BACK end ratio we have to add in all the debts from the credit report PLUS the TOTAL PITI payment.

PITI = $4,751 and monthly debts =$6,500 for a total $11,251

For the back end Ratio we divide $11,251 / $17,500 = 65%

Currently we are WAY OVER the back end Ratio but there may be hope!


Example BorrowerHow do we get the back end Ratio down to 50%?

Let’s take a look at the rental income because this is a two family house. We said the rental income was $2,500 a month.

Will this be enough to make the deal work?

Usually we use 75% of the rental income for qualifying


Example Borrower75% of $2,500 = $1,875 that we can ADD to the borrows monthly income.

We now add $17,500 + $1,875 = $19,375 monthly income

Let’s revisit the front and back end DTI using the updated income.

Front End --- $4,751 PITI / $19,375 = 25% (reduced by 3%)


Example Borrower$17,500 + $1,875 = $19,375 monthly income

Now for the Back End DTI.

$4,751 PITI + $6,500 debts = $11,251 / $19,375 = 58%

58% is WAY better but still NO GOOD. This loan would still be denied.

BUT have faith! We still have MORE options!


Example BorrowerWhat other possible options could there be?

We have not yet looked at their credit repot to see if we could reduce / eliminate any of their monthly debts.

Let’s look at their credit report and see if we can find anything.


Example Borrower


Example BorrowerLooking at this credit report I make the following statement.

Generally speaking, an installment debt with 10 payments or less, generally speaking, don’t have to be included in the DTI.

Can you give me an example of any of the debts that we may be able to eliminate?


Example BorrowerWhat did you find? Did you say that we could eliminate the Credit Card debt? Car 1 And Car 2?

You would be wrong! We can not eliminate the Credit Cards BECAUSE it’s a REVOLVING debt. And we can not eliminate Car 2 BECAUSE it’s a LEASE.

Remember, OLNY INSTALLMENT debts with 10 payments or less can be considered. (Guidelines change so this is not in stone)


Example BorrowerIn this report we can “possibly” eliminate Car 1 payment.

Let’s see how that helps the backend DTI Ratio

Monthly debts are reduced from $6,500 to $6,200.

$6,200 Monthly Debt + $4,751 PITI = $10,951 / $19,375 Income = 57%.

Still NO GOOD… BUT, maybe we can do MORE!


Example BorrowerWe need to get down to at least $9,687 on the backend for this to work. Since we are currently at $10,951 we deduct $9,687 and we know we need to eliminate an additional $1,264 from the credit report.

If we can prove that the lease is paid by someone else we could eliminate that debt. (Company paid perhaps!)


Example Borrower$1,264 - $300 = $964 …. Getting closer!

The student loan is going to count for $300 even though it is deferred for 2 years. (Underwriting Guidelines!)

So we are BACK up to $1,264… Damn!


Example BorrowerTime to put on the thinking cap!

$1,264 is the magic number to eliminate from the credit obligations.

Since Car 1 and Car 2 are eliminated and Child Support is RARE to get eliminated (would have to be 10 months or less – Long shot) We only have the Credit Card debt, Car 3 and the Student Loan.


Example BorrowerIf the borrowers have enough cash to pay off Car 3 and the Credit card they will save $1,050. That still leaves us $214 short of our goal.

Getting to this point, it may look like we are out of options.

However, if they are close and have 6 months reserves left after closing an underwriter MAY do a manual underwrite and look at other compensating factors such as 401(k) accounts, stocks and other assets.


Example BorrowerThe manual underwrite may get approved. Assume that the borrowers have $500,000 in their 401(k), or have stocks valued at $250,000.

That alone may be enough to put them over the top. However, if that does not work the borrower may be able to take $30,000 from their $69,500 down payment left after paying off Car 3, and pay off their student loan debt.


Example BorrowerTime to reevaluate the deal.

If the borrowers paid off the student debt with $30,000 from their down payment they are now good to go on the backend DTI Ratio.

Let’s take a look….

We needed to reduce backend debt by $1,264 and by paying off all the rest of their debt except child support.


Example BorrowerPaying off all the debts in full reduced the borrowers down payment amount to just $39,500 but their backend Ratio should work. Let’s look at the LTV first to see if it still works.

$39,500 Down / $850,000 home value = 4.65% Down for an LTV of 95.35%

Because we have to use the lower credit score of the two borrowers, his 680 credit score may not allow them to put down less than 10%!


Example BorrowerAre we working hard yet to make this deal work?

Are we dead? – NO /// More ideas? – YES!

If we could get the down payment money to equal 10% down or $85,000 we will be good to go on this loan.

$85,000 - $39,500 = $45,500


Example BorrowerWhere could the borrowers come up with an additional $45,500?

A couple of places come to mind.

1) If they have $500,000 in their 401(k) they MAY be allowed to take out up to 10% to use for the down payment without a penalty. That might work.

2) They could get a GIFT from a family member


Example BorrowerStill not convinced?

Now that everything is paid off on their credit reports both credit scores will go up dramatically and they may qualify for 5% DOWN!

That equates to only $42,500. if they have $39,500 they are only $3,00 short.

This deal is gonna work….. Even if we have to make it an FHA deal where they have higher DTI….. 47.9 / 56.9


Example Borrower

REVIEW QUESTION #6

Doug VairoCrossCountry Mortgage

[email protected]

Loanofficerstore.com

Cell: 646-529-2560

mailto:[email protected]

FINAL EXAM

how to qualify borrowers / mortgage calculations · how to qualify borrowers / mortgage...

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