suesinfl
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Post by suesinfl on Dec 10, 2012 20:27:43 GMT -5
Silly question, but I was reading something about people getting loans and their debt to income ratio. I know what the ratio means, but I guess I want to now what do they include in the ratio? I know that it means secured and unsecured debt owed, but do they include childcare, food, electric, etc.?
I realize that those things are not actually debt, but some are necessities.
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Deleted
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Post by Deleted on Dec 10, 2012 20:29:56 GMT -5
I think they just include loans (credit card, cars, proposed mortgage) and not anything else. The other percentage is supposed to cover childcare and utilities. BTW - they don't seem to care about assets either. I'm trying to refinance our mortgage and we have enough in our checking account to pay off our mortgage entirely but they are more concerned about our annual income.
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suesinfl
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Post by suesinfl on Dec 10, 2012 20:47:03 GMT -5
Thanks, I'm just trying to figure out how they determine the other percentage on the cost of living area.
The amount in your checking account and annual income seems kind of crazy to me.
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haapai
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Post by haapai on Dec 10, 2012 20:51:36 GMT -5
Maybe this will help. Maybe it will be way off. I'm not really sure what the question is.
When lenders make decisions to extend credit, they generally don't give a rat's patootie how much debt the potential borrower has, just what the minimum required payments are. Generally they compare gross monthly income to required monthly debt payments.
When I applied for a mortgage, the credit union had me fill out a worksheet that asked me what my current rent was. If rent had not included utilities, they might have asked for that number too. However, I believe that the worksheet in question was a tiny, insignificant part of the lending decision, if that. They may have had me fill out that worksheet only for my own enlightenment.
They sure didn't seem to have looked at the worksheet when it came to offering me a loan. They slid a piece of paper across the table and told me that was the maximum PITI that they could offer. The number on the paper was twice what I thought I could afford. I don't know how I could have eaten or driven with a mortgage that large.
Bottom line, don't rely on a lender to tell you what you can afford and if they tell you that you can't afford it -- thank them!
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midjd
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Post by midjd on Dec 10, 2012 21:02:47 GMT -5
This is my understanding as well.
When I applied for a mortgage, I already had about 3x my annual income in student loans - but because I was on the income-based repayment plan and my monthly obligation was very low (<15% of gross), and I had no other loans, I was approved for a mortgage of about 4x my annual income.
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Tiny
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Post by Tiny on Dec 10, 2012 21:19:31 GMT -5
From the WikiPedia in the Debt to Income ratio section: In order to qualify for a mortgage for which the lender requires a debt-to-income ratio of 28/36: Yearly Gross Income = $45,000 / Divided by 12 = $3,750 per month income. $3,750 Monthly Income x .28 = $1,050 allowed for housing expense. $3,750 Monthly Income x .36 = $1,350 allowed for housing expense plus recurring debt. Yep, as long as your monthly debt obligations are $300 or less - you can afford $1050 a month for PITI according to the 'debt to income ratio'. I wonder if any autopayments to one's Credit Card (like a Cell phone or cable) count as 'debt' in this scenario? That would skew up the calculation I would think. I would say the bank doesn't really care if you can afford food, gas, a car, or retirement savings when they give you their 'estimate' for how much money they will lend you. I also agree that they don't really care about what kind of 'assets' you might have... after all you could spend every penny you have 20 minutes after you close on your new house.
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suesinfl
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Post by suesinfl on Dec 10, 2012 21:49:57 GMT -5
Ok, so if I understand correctly, the lenders only care about what you are paying towards all of your debt and don't care about the necessities? I'm not looking for more debt, just wondering how the lenders determine what you can "afford".
Thank you for clearing this up.
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Deleted
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Post by Deleted on Dec 10, 2012 21:55:39 GMT -5
Think of it this way, they are worried about those entities which would have a legal demand on your money. They figure you can always cut back on food, gas, et cetera.
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haapai
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Post by haapai on Dec 11, 2012 17:21:30 GMT -5
Nope, they really have no idea what your expenses are. If you apply for a mortgage and don't have an automobile loan, there's a good chance that they'll approve you for a mortgage that is so high that you'll never be able to pay for or save for another car. If you have a messed-up driving record and pay sky-high insurance, they won't catch it. If you have a killer commute and spend $500 a month on gasoline, they won't notice.
I don't have kids, so I can't remember if they asked me any questions regarding daycare.
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Deleted
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Post by Deleted on Dec 11, 2012 17:32:30 GMT -5
Nope, they really have no idea what your expenses are. If you apply for a mortgage and don't have an automobile loan, there's a good chance that they'll approve you for a mortgage that is so high that you'll never be able to pay for or save for another car. If you have a messed-up driving record and pay sky-high insurance, they won't catch it. If you have a killer commute and spend $500 a month on gasoline, they won't notice. I don't have kids, so I can't remember if they asked me any questions regarding daycare. they don't care about daycare.
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Deleted
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Post by Deleted on Dec 11, 2012 18:32:46 GMT -5
The woman at my credit union explained it like this during our recent refi. If you take out a mortgage, whether it be for 15 or 20 or 30 years, during that time, you may be paying for daycare, or living on one income, or buying a new car, or taking an expensive vacation, or renovating your home, or paying for college. BUT, NOT all at the same time. Plus all the regular expenses of course (food, gas, utilities, etc).
So, long story short, she said, we approve you for around 30% debt to income total, and then the rest of your money is yours to manage.
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Angel!
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Post by Angel! on Dec 12, 2012 11:54:58 GMT -5
Nope, they really have no idea what your expenses are. If you apply for a mortgage and don't have an automobile loan, there's a good chance that they'll approve you for a mortgage that is so high that you'll never be able to pay for or save for another car. If you have a messed-up driving record and pay sky-high insurance, they won't catch it. If you have a killer commute and spend $500 a month on gasoline, they won't notice. I don't have kids, so I can't remember if they asked me any questions regarding daycare. they don't care about daycare. Some must. I remember Dark saying they had to write a letter to explain they don't have daycare costs & that they don't intend to have daycare costs in the future. Maybe it depends on loan type.
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Deleted
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Post by Deleted on Dec 12, 2012 18:43:03 GMT -5
Dark got a 0 down VA loan. The VA is very protective of its borrowers and can ask some pretty bizarre questions. Of course, any underwriter can ask some strange questions. When we bought the house we're in now in 1995, the underwriter wanted to know why we were buying a house four doors up from our old house. Why would it matter?
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Deleted
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Post by Deleted on Dec 14, 2012 12:01:01 GMT -5
Arggh. This whole refinancing this is very annoying. The bank says I have to get a certified letter from our lawyer saying that our house is held in a revocable trust and that we have power in that trust to refinance. We also need a letter from our CPA because we have independent income. The changes since just a few years ago are a real hassle.
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Deleted
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Post by Deleted on Dec 14, 2012 20:24:03 GMT -5
"The bank says I have to get a certified letter from our lawyer saying that our house is held in a revocable trust and that we have power in that trust to refinance."
Interesting. Is the Trust different from a Living Trust? I ask because the normal process for a refi is to issue a quitclaim from your Living Trust to yourselves and then once the refi is done, quitclaim the property again into your Trust.
A PITA for sure but typically the Trust has no income, the income belongs to the borrower. Therefore the Trust can't qualify for the loan. Once the refi is done, transferring the property back into your Trust is an exception to the "Due on Transfer" provision of the loan under Federal law (Garn St. Germain).
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Deleted
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Post by Deleted on Dec 16, 2012 13:26:09 GMT -5
Bon-Bon - it's a revocable living trust. I did not know about the quit claim method. Thank you for the idea, I will discuss it with the loan officer when we go to the bank. When we refinanced in 2009 our house was in a trust and we simply had to sign a sheet of paper saying that we had the legal authority to do so.
Part of me is very glad they have tightened up the rules. Unfortunately it means that they may not have a lot of discretion even if you have a clear ability to pay with non-W2 income.
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Post by Deleted on Dec 16, 2012 14:11:13 GMT -5
"Part of me is very glad they have tightened up the rules. Unfortunately it means that they may not have a lot of discretion even if you have a clear ability to pay with non-W2 income" Yeah, I got a call from a B of A rep yesterday looking to refi our two existing mortgages with them. I wasn't sure we could qualify given the drop in income we're going to experience next year and just relying on investment income. But with the rates being so low I don't think it's going to be a problem so long as we can show the income on the last two tax returns. I don't think we even need to include the rental income! Based on the quote we got yesterday we might be able to refi non O-O for 30 yr fixed at 3.5%
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