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HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS

HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS. WHAT CAN I EXPECT TO LEARN ABOUT QUALIFYING BORROWERS (In no particular order) Calculation of Basic Income DTI (Debt to Income Ratio LTV (Loan to Value Ratio) FICO Credit Scores What determines the final interest rate on a loan

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HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS

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  1. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS WHAT CAN I EXPECT TO LEARN ABOUT QUALIFYING BORROWERS (In no particular order) • Calculation of Basic Income • DTI (Debt to Income Ratio • LTV (Loan to Value Ratio) • FICO Credit Scores • What determines the final interest rate on a loan • PITI payment breakdown (What else goes into PITI?) • Sample Borrowers

  2. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS WHAT CAN I EXPECT TO LEARN ABOUT QUALIFYING BORROWERS Although some of the things we go over today may seem basic in nature, please understand that it is necessary to building the correct foundation for this class. You may actually be surprised by some of the incorrect answers today! Let’s all agree to just have some fun while we learn!

  3. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS 1st IMPORTANT QUESTION What determines the FINAL interest rate on any loan?

  4. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS 1st IMPORTANT QUESTION Usually I will hear answers like: • Credit • Down Payment • Income • Etc……

  5. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS 1st IMPORTANT QUESTION Let me help you a little It’s a four letter word that with the letter K ____ ____ ____ K Be CAREFUL what you are thinking! 

  6. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS 1st IMPORTANT QUESTION ____ ____ ____ K Here are some guesses I have received over the years: LUCK DUCK BANK 401 (K)

  7. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS 1st IMPORTANT QUESTION ____ ____ ____ K Still need a little help? ____ I ____ K

  8. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS 1st IMPORTANT QUESTION ____ ____ ____ K Still need a little help? ____ I S K

  9. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS 1st IMPORTANT QUESTION ____ ____ ____ K Still need a little help? R I S K

  10. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS 1st IMPORTANT QUESTION Please write this down or internalize it. It may seem basic but it is the foundation of all lending. The HIGHER the RISK the borrower presents to the lender the HIGHER the RATE will be.

  11. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS 2nd IMPORTANT QUESTION What are two of the most important factors when qualifying a borrower? Income and Credit

  12. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS 2nd IMPORTANT QUESTION Think of Income like this: What is the borrowers ABILITY to REPAY Think of Credit like this: What is the borrowers WILLINGNESS to REPAY

  13. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS 2nd IMPORTANT QUESTION These two items are fundamental to this class. We will start with basic Income calculations.

  14. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #1 Without using a calculator please answer the following question by shouting out your answer. A borrower gets paid $6,000 every other week. What is this borrowers monthly income?

  15. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #1 Be HONEST….. Did you say $12,000 a month? That would be an incorrect answer. It’s an answer that is given by MANY students.

  16. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #1 The correct answer is: $13,000 a month Here’s how the underwrites work it out.

  17. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #1 $ 6,000 X 26 (paid EOW is 26 paychecks) $ 156,000 12 (Months in a year) $ 13,000 per month Income

  18. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #1 It may seem insignificant but let’s see what impact it makes to the borrower! A difference of $1,000 a month in income (assuming we could use it all – and we can’t) on a 30 year fixed rate loan at 5% interest would give the borrower an additional $186,281 in loan amount.

  19. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #2 We have a borrower with the following income and work hours: 40 Hours a week at $40 per hour pay. What is this borrowers monthly income?

  20. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #2 We have a borrower with the following income and work hours: 40 Hours a week at $40 per hour pay. What is this borrowers monthly income? Correct answer is: $6,933 I can not tell you how many people answer $6,400. (No Joke)

  21. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #2 Although the above calculations seemed basic and simple to calculate here are a few calculations that start to be a little more challenging: Let’s use the same borrower but this time they also work an additional 20 hours a week OT at a pay rate of 1.5 What is the TOTAL monthly income?

  22. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #2 Correct answer is: $12,133 OT pay is at $60.00 per hour. 20 hours a week = $1,200 x 52 = $62,400 / 12 = $5,200 + $6,933 = $12,133

  23. POLLING QUESTION #1

  24. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #3 We have a borrow who receives $4,000 a month in NON-TAXABLE income. How much do we use to qualify this borrower?

  25. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #3 Answer: $5,000 per month Why? Because we are able to GROSS up NON-TAXABLE income in many cases. (15% and 25% depending on underwriting guidelines)

  26. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #4 What about self employed borrowers or borrowers that own properties? Many self employed borrower’s and property owners reduce their taxes through write-offs.

  27. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS INCOME CALCULATION #4 When mortgage lenders review these type of borrowers income we are allowed to add back into the income many write-offs such as interest paid on mortgages. Let’s say we have a borrower who earns $150,000 a year but has reduced his taxable income to $90,000. We may be able to add back $20,000 and qualify this borrower on $110,000 instead of $90,000.

  28. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS LOAN TO VALUE (LTV) LTV calculations are an important factor in mortgage lending as they can add to the risk level of the loan and therefore add additional costs to the borrower. Not only can the interest rate be higher, but on conventional loans their may be the added cost of monthly PMI (Private mortgage Insurance) added to the monthly PITI payment.

  29. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS LOAN TO VALUE (LTV) LTV is a simple calculation but is important on EVERY mortgage loan. Most lenders are comfortable with the risk an LTV of 80% or less. Let’s look at a few examples on the handout.

  30. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS LOAN TO VALUE (LTV) LTV is calculated by dividing the Loan amount by the Value of the property. LTV is nothing more than a RATIO expressed as a % L V The value on a purchase that lenders use is determined how? The answer is on the next slide!

  31. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS LOAN TO VALUE (LTV) LTV on a purchase transaction is the LESSER of the Appraised value or the Purchase price. This helps avoid fraud. For refinance transactions lenders use the Appraisers value.

  32. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS LOAN TO VALUE (LTV)

  33. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS LOAN TO VALUE (LTV) Let’s calculate a few examples on the handout. You have three homes with different values and different loan amounts. Please write down the answers to all three examples. I will give you a couple of minutes.

  34. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS PITI EXAMPLE It’s important to know the total PITI payment before we can move onto any DTI (Debt to Income) calculations. Therefore it’s important to understand WHAT goes into a PITI payment. Can anyone tell me what can go into a complete PITI payment used for mortgage calculations?

  35. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS PITI EXAMPLE If you said Principal Interest Taxes & Insurance you are on the right path but there is MORE that could be added in some cases.

  36. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS PITI EXAMPLE For example, if this borrower had an LTV greater than 80% on a conventional loan they may be required to pay a monthly PMI insurance. If they are taking an FHA loan they are 100% paying MIP (Mortgage Insurance Premium). In ADDITION… there may be more……

  37. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS PITI EXAMPLE If the borrower is purchasing a Condo or Co-Op they will also have a HOA Fees (Homeowners Assoc. Dues) or CAM Fees (Common Area Maintenance Dues). If a borrower has any of these fees, many times their Insurance and / or Taxes may be included in that fee and we would NOT double count that against the borrower.

  38. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS PITI EXAMPLE Let’s create a complete PITI payment for the following borrower: Borrower is buying a single family home. They have $50,000 they can use for a down payment. They purchase a home for $500,000. Their loan amount (sans closing costs to keep it simple) would be $450,000. It’s for 30 years fixed rate at 5%. Assume Taxes of $12,000 a year and H/O Insurance at $1,200

  39. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS PITI EXAMPLE For this borrower the PITI would be worked out like this: Principal & Interest P $ 2,415 I Real Estate Taxes T $ 1,000 Home Owners Insurance I $ 100 (Flood Insurance would be added here if needed) PMI / MIP (if needed) $ 300 (I just made up the $300 as an example) NO HOA or CAM in this example ------- TOTAL PITI Payment = $ 3,815

  40. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS PITI EXAMPLE Later in class I will create a borrower with income, job types, home purchase, credit report, etc. and I will walk you through the qualification process from start to finish.

  41. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS PITI EXAMPLE WORKSHEET

  42. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS PITI EXAMPLE WORKSHEET The PITI example worksheet is just a sample of what we look for with every loan. I use this worksheet to train loan officers how to calculate different parts of a payment. We will not be using this document in it’s entirety at this class. We will quickly calculate the first three examples to give you an understanding of why I do this. The rest of the examples are there in case you want to work them out on your own.

  43. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS DTI (DEBT TO INCOME) RATIO Now that you see how these calculations are completed, let’s hop over to the next calculation in the qualification process. DTI (Debt to Income) Ratio

  44. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS DTI (DEBT TO INCOME) RATIO DTI calculation is the same as we do for LTV. Borrowers Monthly Debts D (There is a Front End and a Back End Ratio to consider) _____ Borrowers Monthly Income I

  45. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS DTI (DEBT TO INCOME) RATIO For DTI calculations lenders consider what they call: Front Ratio / Back Ratio Housing Ratio / Debt Ratio Top Ratio / Bottom Ratio (only used by Caylx Point LOS)

  46. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS DTI (DEBT TO INCOME) RATIO Front Ratio / Back Ratio Housing Ratio / Debt Ratio Top Ratio / Bottom Ratio No matter what the terminology, all these terms mean the same thing. I will explain on the next slide.

  47. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS DTI (DEBT TO INCOME) RATIO Front Ratio / Back Ratio Housing Ratio / Debt Ratio Top Ratio / Bottom Ratio Front Ratio means the same as if I said Housing Ratio or Top Ratio. Back Ratio means the same as if I said Debt Ratio or Bottom Ratio

  48. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS DTI (DEBT TO INCOME) RATIO Front Ratio / Back Ratio Housing Ratio / Debt Ratio Top Ratio / Bottom Ratio The most common terminology used in the industry is a combination of Front / Back / Debt… so if you hear these terms you will know what we are talking about! 

  49. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS FICO CREDIT SCORES Mortgage companies across the USA all use the same FICO Score Model 8 at this time. This keeps everything fair and equal for all borrowers. BUT… All FICO and Credit scores are not the same. Other companies and the FICO company offer different score models.

  50. HOW TO QUALIFY BORROWERS / MORTGAGE CALCULATIONS FICO CREDIT SCORES Remember this saying…… If it’s not a FICO score…. It’s a FAKE-O score! FICO scores range from 300 to 850. Other scoring models have ranges from 250 to 900! Although we will lend to scores as low as 580 an acceptable starting score is 640, a good score is 680 and a great score is over 740.

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