Agents and Loan Officers Working Together to MAKE Deals Happen (Legally and Ethically)
Sometimes the borrower(s) have great credit, good income and good assets but they still do not qualify for the best loan. How could this be? The answer is simple: they spend too much on credit!
First let me define for you Debt to Income Ratio: It is the ratio of debt to income. (Okay, sorry, could not resist.) Debt to Income Ratio (DTI) is expressed in percent. So a 20% DTI means the applicant spends 20% of their gross income on credit purchases every month. The debt is determined by the amount of monthly minimum payments shown on credit:
Mortgage $1500 Car 1 $400 Car 2 $320 Credit Card 1 $65 (minimum payments) Credit Card 2 $30 School Loan $100 Personal Loan $80 Revolving Account $15
Total debt $2510 per month Total GROSS income $5500 per month
Debt / Income = DTI 2510 / 5500 = 45%
This ratio is called the BACK ration. The FRONT ratio is housing expense only. Depending on what type of loan your client is getting usually only the BACK is going to present a "challenge". In the example we showed a DTI of 45 (how it would be said by the lender/loan officer) which is probably not going to be a "challenge".
Don't guess about DTI, ask the LO if they have run DO, DU, LP - whatever is being used for the underwriting engine - and if the DTI is acceptable. If it is not acceptable there are things that can be done to fix it.
Feel like asking your customer's boss of they can get a raise? No joke - been there, done it, got it, closed the loan. (But that's why you should call me - ha! I'm witty tonight.) Actually getting a raise can greatly offset the DTI even more than the "easier for you" tip of paying off some debt. Back to our example ...
Let's pay off that Revolving Account and Credit Card 2:
2465 / 5500 = 44.8 (we round UP so it's still 45)
Now let's get the borrower a $1.00 per hour raise or $160 per month:
2510 / 5660 = 44.3 (we round DOWN so it's 44)
Do both and:
2465 / 5660 = 43.5 so pay down Credit Card 1, rescore or repull and now you're in that magic 43 DTI range for FHA.
Once again, never guess on this and always see what the underwriting engine returns. A good processor/loan officer can make or break a loan on how the debt and income is structured in the submitted file.
Thanks for reading - please share. Want to know how to ask the employer for a raise? You have to call me :)
THE OPINIONS IN THIS COMMENTARY ARE STRICTLY KEN COOK's PERSONAL OPINION AND NOT REFLECTIVE ON ACTIVE RAIN, NOVATION MORTGAGE, or ANY SPONSOR OF THIS WEBSITE.
EDUCATION BEATS LEGISLATION EVERY TIME. Get your clients, friends and family members to a LENDER RUN home mortgage seminar as soon as possible.
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NOTICE: I have been writing in this blog since July 2006. Some of the older articles may contain information that has changed. Please check the date and phone me if you have any questions.
I do this 10 times a day for callers from my web sites. It works. Zero in on that price range before spending time touring with a home buyer.
I spoke with a lady yesterday that wanted to tour homes in the $175,000 price range. GEEZ! Her income/debt ratios qualified her for about $117,000.
Back to the drawing board for her.
I have never understood why real estate agents do not learn these simple calculations. My experience when a buyer calls is that when I offer to "run the numbers" for them, they are grateful.
Then there's the guy that called early yesterday who wanted to tour condos in the $250,000 range and when I asked about income to qualify him, he said he would never reveal his income to an agent. I told him we couldn't help him and said "goodby".
BTW, I don't understand Jeff Belonger's comment above.
Great, I will check back often. I really like the blog. I am new at blogging but I am beginning to learn quite a bit from reading blogs like the ones I find on Active Rain. If I can ever be of help just let me know.
This is a helpful explanation and so clearly worded that it wil help me to work with my buyer clients. It is sometimes difficult to explain the back and front ratios to them. I've tried to work with some to improve that ratio but many are absolutely convinced that the only thing that should matter is whether they currently pay their house payments and their front ratio. It must be true because so-and-so on some TV program said so! (We all know that talking heads on tv know everything).
Jennifer - I hope it is simple and accurate thanks!
Matt - wow, I am honored and flattered. Thank you.
Lenn - Jeff was being funny in his Jersey humor about my opening line. "agents and loan officers working together to make deals happen". So, when are you going to write a book that needs to become required reading for agents? Seriously, I really thing you should.
Terry - welcome to active rain. I will subscribe to your blog and read what you say. You should also join us on Twitter. Thanks!
Susan - I always ask, "well is so-and-so on the radio/tv/internet lending you the money?" In a nice voice with a cute smile of course. Thank you for your comment!
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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Ken... you mean that I have to work with the real estate agent? lol <teasing> Nothing worse when a realtor works against you, for whatever reason...