After so many years of qualifying mortgage clients by the same rules our fathers, or Grandfathers played horseshoes, many loan originators have never had to actually meet strict numbers!

Well times have changed, close no longer works! You've got to throw ringers or lose. Those pesky Debt to Income and Housing Expense ratios have again infested our vocation. We've virtually ignored debt ratios for over a decade, but no longer.

We add up those selected recurring payments from the right side of the 1003, then add the proposed housing payment (PI-TI, MI) and divided it by the allowable portion of the applicant's income. Then we panic!

 Despite the clients demonstrated ability and willingness to pay, the back end ratio, Debit to Income, DTI is to high to meet the program guide lines. Now what? I would determine how much I had to lower the total monthly payments and how much cash the client had available, or I could generate for him.

 In the past.

I'd look for payments we could allocate/blame on some one else, and can we prove they make the payments (You must prove someone else made all the payments or the latest 12 payments, which ever is less. If your ex was ordered to make the payments, you must prove they've made the last 12 payments or all payments since the court order, this normally takes co-operation.

I'd look at the non-revolving debts and determine the remaining number of payments remaining. Usually, you can excluded debts that have 6 payments or less remaining, or that can be paid ahead so that there are only 6 payments or less. (Just because you're talking about a conforming loan program, Fannie Mae or Freddie Mac, doesn't mean all lenders have the same standards. The number of payments left that can be excluded can vary from none to 12.)

Reducing the balance on non-revolving debt, if it reduces the term can be an affordable method of reducing DTI. Also, consider refinancing supper friendly loans, with credit unions and local banks or S & L's, either extending their loans to reduce payments or raising payments so that the term is 6 months or less. Yes, I did suggest raising payments to reduce DTI!is that paying off, buying down, and excluding also works with child support! Changes in child support will take cooperation from the ex and a court order! Where did the "hazard insurance" (The second "I" in PI-TI.) estimate come from? Insurance is often considerably less when your car insurance and home owners insurance are from the same company, even more when there are two (or more) cars and the house. Married couples often miss this. Those playing house almost never consider it, "Gays" and straight room-mates, rule themselves out, but this savings is also often available to any couple buying and living in a home together. Talk to the insurance agent, your clients may well end up with better insurance at a lower cost.

An often over looked opportunity, an over looked freebie.

I'd have taken a copy of the 1003 and recheck the listed payments against the minimum payment as listed on credit report. If you list the $200.00 that the client says he pays each month as opposed to the $36.50 he's obligated to pay, the whole $200.00 will be included in the DTI! I then divided each revolving debt payment by the loan balance, noticing the percentage of the payment compared to loan balance. I do this because the client rarely knows the cost of revolving debt and if we do recommend reducing or paying off revolving balances that we get the most payment reduction for the dollar.

Be careful! Very careful!Finally, revolving credit holds the promises that you can pay it down or off today and get the cash back tomorrow. Don't let the client use money he'll need to close and to meet reserve requirements!

Manipulating revolving debt is like doing surgery with an ax, a doubled bladed ax! With one strong stroke you can instantly cut your payment and life is good! Until, you discover that your back swing killed your credit score. Anything and everything done with revolving debt must be carefully planed! Improvements in DTI must be tempered with the effects on credit scores.

Start with a freebie!

Troubled and marginal clients will forgive you for not getting them approved, but not if you've cost them money!

Bill

William J Archambault Jr

The Real Estate Investment Institute

For the record, close only counts in horseshoes and hand grenades!