by Caeli Ridge
One of the most heavily weighted (if not the most weighted) criteria for qualifying for any full doc mortgage is DTI (debt to income ratio) that is monthly debts vs the monthly income we can prove. DTI can be a tricky thing to understand let alone try to quantify from an underwriter’s perspective. So here’s what you need to know.
Most mortgages will be based on a 50% max DTI. That’s verifiable monthly income/monthly debt. For W-2 and wage earners the income calc is relatively easy. For self-employed individuals is a bit more complicated. For this conversation, we’ll stick with the W-2. Let’s start with the income. The abbreviated version of this calculation is; Salaried wages, use monthly salary, and/or any variable income (hourly, part-time, commission, bonus, overtime), which will be averaged over the prior 2 years plus current year to date. And now for the monthly debts; Almost exclusively we will only be looking at the monthly expenses that we’ll find on your credit report, the almost is equal to 3 exceptions;
- HOA dues,
- primary housing expense if a renter
- And lastly, taxes and insurance on a property, those are not included in your monthly management payment.
Otherwise, all other liabilities used in the DTI calculation will be gleaned from the individual’s credit report. So things like utilities, cell phone, gas, food, etc will not be part of this UW calculation. Now you have a baseline definition of DTI.
Now here’s where it gets fun. You all should know, that as I sit here drafting this ‘lending how to’ I imagine all of you having the absolute time of your lives reading it. For those of us that currently own rental properties that are reporting on our Schedule E’s (or those who are SE), we have a unique opportunity every year to define or re-define (at least partially) how our DTI will be effected with last years’ filing. Good news Ladies. We find ourselves in that very space (before taxes are due) right now. Prior to filing your 2017 tax return, you have the option of having your mtg professional (hint RLG) review the DRAFT version and advise how 2017 will characterize your 2018 ability to qualify for loans. The feedback of reviewing that draft tax return could be one of several things;
- file the return as is.
- Perhaps filing an extension is the play for optimizing the DTI for the year.
- Or maybe we advise carrying some losses fwd into the following year (#3 requires a further conversation between you, me and you’re CPA of course).
But in any of those scenario’s, having the opportunity to discover in advance what options you have gives you an edge. Having access to the information so that you can then make the most informed decision is the goal. Then working to ensuring you are able to capitalize on the highest and best use loan rates and terms out there would be the result.😊 I and the rest of the RLG Team wish you all great success in all your real estate pursuits!! Happy investing Ladies.
Contact Caeli Ridge at:
Toll Free 855-74-RIDGE (74343)