Why a Mortgage Professional is like a Surgeon

A surgeon has to go through several steps to determine if surgery is necessary. If you ever walked into a Doctors office and you were told that you needed surgery without thoroughly reviewing your individual situation you would most likely walk out and never return. The same should hold true with your mortgage experience. Reviewing your income is like surgery.

Income Review – Surgery time!

Debt to Income ratio (aka DTI) is a TLA (three letter acronym) commonly used in the mortgage industry. What is it and why do you care? The DTI is a very basic formula that all banks use to determine the mortgage and/or housing payment you can qualify for. It’s so easy even a caveman can do it. Take your new mortgage payment (including Taxes, Insurance, HOA fees, Mello Roos) and add all of your monthly installment and revolving debt. This number is then divided by your gross income and poof! you just calculated a DTI. For most loan products the maximum acceptable DTI these days is 45% of your gross income. i.e if you make $10,000 per month your maximum total expenses can be $4500.

WARNING: Calculating the DTI correctly takes a Surgeon not a Caveman. In fact, after originating, underwriting, and managing thousands of transactions, I constantly have to keep up with updated guidelines. The maximum DTI changes and so does the requirement on how they are calculated. Some of the most common items that are reviewed to determine accurate DTI’s are:

  • Tax returns
  • W2′s
  • Partnership Agreements
  • K1′s
  • Divorce Decrees for Alimony and/or Child Support
  • Asset Statements
  • Pay Stubs
  • Social Security Award Letters
  • Pension Award Letters
  • Verification of Employment forms to determine bonus and or overtime

Your income is calculated differently whether you have increasing or decreasing income over the last two years. How are you calculating your rental properties? Depreciation expenses? Depletion? Unreimbursed employee expenses?

When your mortgage professional gives you the okay to buy a new home or refinance your existing loan, he had to review all of the above income documents. If not, run Forrest run…

No income loans, Liar Loans, or more commonly known as Stated Income loans are ancient history, so working with a mortgage professional who knows how to correctly analyze your Debt to Income Ratio will save you time and money. If you heard a story from your friend about how his loan transaction exploded – it was probably due to an incorrect calculation of his or her DTI.

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