- 1. Understanding Debt-To-Income (DTI) August 19, 2010 Patrick
Brock Mortgage Loan Officer Bank of America Home Loans 626-253-3944
(cell) [email_address]
2. What Is Debt-To-Income?
- The debt-to-income ratio indicates how much of the buyers
income goes toward debt payments.
- The debt-to-income ratio can be used to determine whether the
buyer has too much debt to qualify for a loan.
3. DTI Guidelines for Qualification
- As a general guideline, the maximum total debt-to-income (DTI)
ratioshould not exceed 36 % .
- Certain loan programs may contain specific criteria that are
more restrictive and/or different from these standard
guidelines.
- An excessive DTI ratio generally indicates that the buyer has
insufficient capacity to support total monthly obligations.
- The risk represented by the excessive DTI ratio can be offset
by acceptable compensating factors.
4. Compensating FactorsStrong credit characteristics that can be
used as a strength to offset risk
- A successful history (for at least 12 to 24 months) of paying
previous housing expenses that were equal to or greater than the
proposed monthly housing expense.
- A large down payment (over 20%) toward the purchase of the
property.
- Purchase of a property that qualifies as anenergy-efficient
dwelling , due to lower utility costs. Credit ratios may be
increased up to 2% over the maximum allowed.
- A demonstrated ability to devote a greater portion of
income-to-basic needs like housing expense.
5. Compensating Factorscontinued
- Lowering the monthly housing payment.
- A demonstrated ability to accumulate savings and to maintain a
good credit history or a debt free position.
- A potential for increased earnings and advancement, because of
education or job training, even though they have just entered the
job market.
- A net worth substantial enough to evidence the ability to repay
the mortgage.
- Reserves substantially higher than required by the
program.
6. How To Calculate DTI
- Expenses (Debt)- The applicant's recurring charges or
payments.
- Income- The applicant's verified gross monthly income from all
verifiable sources that can reasonably be expected to continue for
at least the next three years.
- Total Debt-To-Income ratio- Ratio determined by dividing the
total of monthly housing expense and other monthly expenses by the
gross monthly income. The results of the ratio computation are
always rounded up and are expressed as percentages.
- Total Monthly Expense (Debt): $ 1,700
- Multiply by 100 to convert to %: 36% (rounded up)
7. Two Sides To Debt-To-Income Ratios
8. Whats Included Expenses (Debt)
- Expenses are usually expressed in terms of a specific time
period (e.g., monthly, annually, etc.).
- Recurring expenses must be expressed in terms of their monthly
cost:
-
- Annual expenses are divided by 12
-
- Quarterly expenses by 3, etc.
-
- Payments on installment loans
-
- Revolving credit (Credit Cards)
-
- Mortgages (including taxes and insurance)
9. Whats Most Important ToThe Underwriter EXPENSES (Debt)
- Expenses The UW cares most about the items and expenses
appearing on the buyerscredit reportat time of application.
- All expenses appearing on the credit report will be included in
the DTI ratio unless earmarked to be paid-off/paid-down, excused,
or otherwise explained and excluded.
- Rule of Thumb If it appears on the credit report, it is an
expense effecting the buyers DTI ratios.
10. Whats Included - Income
- Acceptable Income Sources:
- Alimony, Child Support or Separate Maintenance
- Business Expenses (Unreimbursed)
- Disability/Workers Compensation
- Interest and Dividend Income
- Military Income or Military Reserve Income
- Payroll Services/Leasing Employees
- Projected or Proposed Income
- Retirement Income Annuity, IRA/Keogh, Pension and
Retirement
- Seasonal Unemployment with Associated Unemployment
Compensation
- Section 8 Payment Vouchers
- Social Security Retirement/Surviving Spouse or Child and
Supplemental Security Income (SSI)
- Unemployment Compensation
- Voluntary Separation Incentive (VSI)
11. Whats Most Important ToThe Underwriter - INCOME
- Income The UW cares most about theverificationof ALL income
listed on the buyers application.
- Employment Income Pay stubs for the last 30 days.
- Passive Income (Pension, Retirement, Disability, Social
Security, etc.) Most recent statement verifying receipt of the
passive income for at least the next 3 years.
- Rule of Thumb Any income stated and utilized to determine DTI
ratios NEEDS to be verified at time of application.The UW will
verify the income again prior to drawing closing documentation
(this is done to be sure no significant changes to income have
taken place during the escrow process).
12. How To CountCOMMISSION Income
- Whencommission incomeis used as qualifying income, the
applicant must have atwo-year consecutive historyof
receivingcommission incomeand the income must be likely tocontinue
for the next three years .
13. How To CountOVERTIME Income
- Whenovertimeis used as qualifying income, the applicant must
have atwo-year consecutive historyof receivingovertime incomeand
the income must be likely tocontinue for the next three years
.
- The applicants overall income should be evaluated using the
hourly rate, the number of hours worked, to develop an average of
overtime earned to determine the amount that is most likely to
continue for the next three years.
- The loan file must contain an analysis of the income used to
qualify.
14. How To CountBONUS Income
- Whenbonus incomeis used as qualifying income, the applicant
must have atwo-year consecutive historyof receivingbonus incomeand
the income must be likely tocontinue for the next three years
.
15. The Effect of Paying-Off Debtto Help Qualify
- Generally, the pay-off/pay-down of debt can substantially
decrease the risk factor of a loan.
- Consideration must be given to the type of debt being paid-off,
as well as the applicants spending habits, source of funds used to
pay-off/pay-downthe debt such as gift funds.
- Verificationof sufficient funds to pay-off/pay-down any debt
must be provided in the loan file.
16. When To Include Pay-Off/ Pay-Down in DTI Ratios
- Installment debt with 10 or fewer months remainingshould notbe
included in the DTI ratio, unless the payment is substantial and
the applicant has limited cash reserves.
- If a revolving account (credit cards, etc.) is to be paid-off
or paid-down but not closed, the existing monthly payment on the
current outstanding balanceshouldbe counted in the DTI ratio.
17. Acceptable DTI Ratios
- Vary From Product-to-Product
Here are a few examples Conforming Fixed Conforming Fixed Period
ARMs FHA 18. Conf Fixed Rate Products
- Qualifying Debt-To-Income Ratios :
- Loan-To-Value (LTV) > 80%:Maximum DTI is 41% regardless of
Digital Underwriting (DU) decision.
- These ratios may be exceeded if there arecompensating factors
.
19. Conf Fixed Period ARM Products
- Qualifying Debt-To-Income Ratios
-
- Loan-To-Value (LTV) < or = 80%: 28/36%
-
- Loan-To-Value (LTV) > 80%: 28/36%
-
- Max DTI is 41%, regardless of the DU decision.
-
- LTV > 80%: Maximum DTI is 41%, regardless of the DU
decision.
- These ratios may be exceeded if there arecompensating factors
.
- Maximum DTI on 3/1 and 5/1 ARMs is 40% on manually underwritten
loans withcompensating factors .
20. Federal Housing Administration (FHA) Products
- Qualifying Debt-To-Income ratios :
- Ratios may exceed standard guidelines with strongcompensating
factorswhen the loan is manually underwritten
- Applicants with insufficient credit history are limited to a
DTI ratio no greater than 31/43 and compensating factors do not
apply.
- Ratios may exceed standard guidelines with a Digital
Underwriting result =Accept/ Approve .
- Ratios may be exceeded to 33/45 for energy efficient
transactions.
21. 22. Thanks For The Opportunity! Please let me know how I can
help.