Capacity

To put it very simply, you need to prove that you can repay the loan.

To determine if this is the case, the underwriter will analyze employment status, annual income, and debt. The underwriter will also review assets, such as savings and checking accounts, stocks and bonds, 401(k), and IRA accounts. Cash reserves may also be reviewed, to determine how well you can stay on top of your bills and expenses, if your income suddenly stops for any reason.

Lenders look at two calculations (also called ratios). They are:

  1. The first is your Housing Ratio (also called the front-end ratio). It is the percentage of your proposed total mortgage payment (principal & interest, real estate taxes, homeowner’s insurance and, if applicable, flood insurance and mortgage insurance) divided by your monthly, pre-tax income. An ideal Housing Ratio would be 28% or less; although, at times loans can be approved at a higher number. That is due to the fact that your front-end ratio is looked at in conjunction with your back-end ratio.
  2. The second is your Debt Ratio (also called the back-end ratio). This starts with that mortgage payment calculation from the Housing Ratio and adds to it the current payment obligations that would show up on your credit report (car loans, minimum credit card payments, student loans, etc.). A good back-end ratio would be 40% or less. However, loans sometimes are approved with higher debt ratios.

Remember that every application is different. Income can be impacted by overtime, bonuses, job history, unreimbursed expenses, commission, and other factors. Consult an experienced Mortgage Advisor to determine how the underwriter will calculate your numbers.

Let’s look at a real-life example.

Below is a hypothetical debt-to-income calculation for Shimon & Chani:

Monthly Obligations:

1) Proposed housing payment (including real estate taxes and homeowner’s insurance): $2,000
2) Car payments: $300
3) Other loans: $150
4) Minimum payments on credit cards: $150

Income:

Shimon’s monthly gross income: $5,000
Chani’s monthly gross income: $5,000

Debt-to-income calculation:

Total obligations: $2,000+$300+$150+$150= $2,600
Total income: $5,000+$5,000= $10,000
DTI=26%

In this case, the debt-to-income ratio of 26% would likely be viewed positively. Lenders will usually accept DTI’s as high as 45%, and in some cases up to 50-65%.

3 Comments

  • Jhon Miller
    Posted June 27, 2017 3:08 pm 0Likes

    Love this blog! It provides all the necessary information and gives the best advice!

    • Mark Chapman
      Posted June 27, 2017 3:11 pm 0Likes

      Thank you! Please stay tuned for more updates

  • Miki Williams
    Posted June 27, 2017 3:09 pm 0Likes

    One of the best websites so far. It suits any financial company perfectly, and seems to be working in any mobile device!

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Frequently Asked Questions

Is a fixed-rate or adjustable-rate mortgage better?

Fixed-rate mortgages make sense for buyers when the current mortgage rate is low. This allows you to lock in the current rate and be protected from increases that are likely to take place over the next 30 years. If the current rate is high, an adjustable-rate mortgage may be better because rates can drop. It is good to remember that you will have the option to refinance in the future to take advantage of rate changes as well.

What goes into closing costs?

Fixed-rate mortgages make sense for buyers when the current mortgage rate is low. This allows you to lock in the current rate and be protected from increases that are likely to take place over the next 30 years. If the current rate is high, an adjustable-rate mortgage may be better because rates can drop. It is good to remember that you will have the option to refinance in the future to take advantage of rate changes as well.

What documents do I need when closing a loan?

Each lender requires slightly different financial records—this will depend on the type and amount of the loan you are applying for. However, there are some basic records all lenders will request. These include income records (i.e. pay stubs for the previous 30 days, the last two years of tax returns, 2 to 3 months of bank records for each of your bank accounts, and any other additional documents that prove your income). You will also need to furnish information about your current debts such as account numbers and monthly payment information.

Can I use 1st empire Elite Financial if I am not buying with Dr. Mortgage Real Estate?

Yes! We’d never want to exclude anyone from saving big bucks just because they’re not using Homie Real Estate services.

How quickly will the loan process be completed?

We don’t like to brag, but we usually have a quick turnaround time for most loans. You’ll be made aware of your loan progress ASAP

What are fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs)?

The interest rate for a fixed-rate mortgage is set in place over the life of the loan. On the other hand, an adjustable-rate mortgage can have its interest rate rise or fall during specified adjustment periods.

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