Calculating the Income Portion of the Debt To Income Ratio

• Introduction
• The Debt to Income Equation
• Best Case Scenario for maximum debt to income by loan type
• Whose income do I get to count in the calculation?
• How do I figure out how much income I get to count?
• How long do I have to work in order to count my income?
• Exotic Income programs- how do they work?
• Conclusion

Introduction

In our last blog we tackled the first part of the debt to income ratio, namely figuring out how we calculate debt in the debt to income ratio.  Click here for part one.  Today, we will talk about how we calculate the income portion of the debt to income ratio.   This, as with most things mortgage related, is often times more complicated than you would think, and very individually fact dependent. If you need any help please feel free to call me at 832-557-1095 or email me at gabekmg@gmail.com, and we can give you a free consultation and help you figure out what your numbers are.

Finally, at long last this is the last of a now 8 part series I’ve been working on specifically for first time home buyers (or first time in a long time home buyers) taking a detailed look at how the home buying process works, from knowing when you are ready to buy a home, to how to buy a home, all the steps in the process, how much money you need, how to work on your credit, and finally, answering if you can afford to buy your house.  If you are interested in any of the other articles please click here!

 

Can I afford this house?  The debt to income question.

The formula to figure out your debt to income ratio is to add up all of your monthly payments for financed debt (things like vehicles, boats, credit cards, student loans, child support or alimony obligations) and add in the full value of what you are paying for your house (your principal, interest, taxes, insurance and home owners association dues) to get your numerator (for the math challenged that’s the number on the top of the fraction), and then add up all the income of all the co-borrowers to get the denominator (that’s the bottom number on the fraction).  Once you get those two numbers in your fraction you convert that number to a decimal (It should be somewhere between 0 & 1) and go from there.

I know, you thought there would be no math, right?

Generally, the best case scenarios for highest allowable debt to income ratios for loans are as follows:

• FHA- .559999999
• VA- .56 or .57 (But I did once get an approval for a guy with a 67% dti- but that was seriously unexpected)
• Conventional- .4999999
• Affordable program- .45 or .46, but sometimes up to .499999
• USDA- same as affordable- somewhere between .45 and .50
• Jumbo- .42 or .43 as a general rule (these are more case specific than any other deal though)
• Construction/Land- .43 or so
• Hard Money- debt to income ratio?  What debt to income ratio?  How much cash you got bro?

Whose income do I get to count in the debt to income ratio?

Finally, a straight forward and easy question!  The borrowers.  Anyone that is a borrower.  Co-borrowers.  Co-signers, you name it, if we ran credit and deemed it possible to add this person to the loan and they are willing to sign then we get to use that income.  The question of how much we get to use will be talked about later.

What you might have noticed, however, is that we only get to use the income of borrowers.  I have lots of people call me and say- my wife has good credit, I make good money- can we use her credit and my income?  Or vice versa, of course.  Sadly, the answer to that is no- we cannot.  Only borrowers income can be used.

 How much income do I get to count?

So, last question was a softball, with an easy answer.  This one?  Not so much for many people.  This section will probably be an entire blog post some day (actually that’s not true- this has about 5 or 6 different component parts that will probably all be their own blog posts someday). I know, not since George RR Martin slaving away at writing a Game of Thrones book every 7 or 8 years will there be so many people waiting breathlessly for written content to be published. I expect to break the internet in anticipation…

 

Easy and overly simplistic answers on how to count income:

• Salary- We get to use all of it- provided you’ve been on the job an appropriate amount of time
• Hourly- If you work full time, or full time and overtime, we get to multiply your rate by 2080 hours in a work year for your base
• Commission- 2 year average is going to be necessary- not necessary to be at the same company but must have a history of it and be standard in the field of work
• Overtime- Again, we are going to go back two years and take an average of all the overtime you’ve worked. If it’s at the same company and the same job and the employer answers that you will be eligible to receive overtime in the future then we get to use all of it. If you’ve hopped jobs from company to company we are going to need to see a track record
• Part Time- We are going to want to go back, drum roll please, 2 years and look at what’s been going on
• Seasonal- We are going to look at your taxes, the nature of the job, and your track record and go from there.
• Self employed- 2 years track record of owning the company.  Then, we are going to look at what you told the IRS you made on a Qualifying Mortgage. If you don’t like that answer I’ve got some exotic products for you that we will talk about a little later
• Retired- Congratulations. We probably get to count your entire pension.  We also probably get to count 125% of your social security award
• Disabled- Probably get to count all of it, provided it’s a permanent disability, and if you don’t pay taxes we probably get to count more than 100% of it.

Again, this stuff is really complicated and many of these questions will be a full blog.  Call me and I would love to look at your individual circumstance. It really isn’t one size fits all.  Put an income question before 10 underwriters and you might get 13 different answers…

How long do I have to work in order to be able to count my income?

Sue, my loan partner, always tells me that income has to be reliable and recurring.  I think she might have even suggested I write that down on a rock or something somewhere.  And this makes sense if you think about it from a lender perspective- they want to know that the money you made last year you will make this year and likely to make again next year.  So, part of being reliable is being in the same job and same field for a while.  So, if you want to buy a house, make sure you don’t follow Johnny Paychecks advice here in one of my favorite songs ever:

You are going to need to be in the field for 2 years. Or at least have education or a certificate or barrier to entry.  How do we define same field?  Would you believe that it varies in each individual case and there is no clear cut answer?  Yes, yes you would if you’ve been reading this blog for a while now.  But generally it’s not too picky.  Move from server to bartender?  Sure, no problem.  Move from teaching math to english?  Yep, that works.  Go from running a title company to working on commission as a mortgage broker. Nope, you get to sit in a 2 year penalty box and prove yourself in the new field before you get to buy a house again Mr. Winslow (my time in the penalty box ends in 2020- whoooo hooooooooo!!!!!)

If you’ve taken some time off and it’s a lot of time, and been back on the job less than 2 years we can probably make that work after about 6 months.  Provided it’s the same field. If you were out of a job for a paycheck or two that’s not going to be a gap in employment.  6 years?  Yep, you are going to have to be re-established in the work force.  Going from salary to commission or 1099?  Probably a problem.  Moving the other way around?  Maybe just a paycheck.  Shouldn’t be a problem at all.  Moving from one place to another?  Same company transfer no problem at all.  Different companies?  Probably need an offer letter.  Some instances we might need 30 days worth of paystubs.

How do exotic income programs work?

Again, this can be ridiculously complicated and I will flesh lots of these out individually in later blog posts, but a quick heads up to whet your whistle

• Bank statement loans- we use your personal bank account or business bank account- look at the deposits made for 1 month, 12 months or 24 months, and impute income to you based upon how much money is going into the account
• Cash flow qualifier- what to do when you can’t prove income but you want to buy a rental house?  Let the house do the work for you.  You can ignore your income and debts (provided your credit is decent and you’ve got a down payment) and the rental market of your investment property house acts as the income to qualify you for the loan
• Asset depletion- OK- so you are sitting on $5,000,000 in the bank. You clearly don’t need to work anymore. But you want to buy a house and have a mortgage- b/c… why not?  You are killing it in the market and don’t want to take the money out of your investment portfolio.  Asset depletion might be for you. We will calculate your imputed income (conservatively) from your investments and see if we can qualify you that way
• Stated income?  Nah, not yet.  But eventually, someday, God willing and my babies got to eat this will be back…

So- there’s no downsides to these exotic income programs, right?  Well, it’s going to take a bigger down payment, decent credit and a little higher interest rate. But if you are self employed would you rather I tell you that you have to claim $200,000 in income for the IRS and pay a 33% marginal rate, or would you rather I take a look at your bank statements- say- yeah, that’s cool, and pay a little higher interest rate?  Yeah, lots of times this is a life saver and easier by far to pay the higher rate than a boat loan of taxes.

Conclusion

Of all the things we deal with in the mortgage industry income calculation is probably the most specific, bewildering and confusing.  If you need help figuring out how much money you make for mortgage qualifying purposes please call me at 832-557-1095 or email me at gabekmg@gmail.com and we will give you a free consultation.