When figuring mortgage affordability - Income, Debts, and Cash all need to balance...

This edition is kind of a Qualifying 101 discussion. It's a brief overview of general qualifying standards and the relationship among them.

Use the info here to answer some of your buyers' initial financing questions, then have them call to be PreApproved before you submit an offer.

Each is considered by itself, then again as part of the overall picture -

Today we're talking about the cash flow considerations of

qualifying for a mortgage.

Usable income, balanced with overall debt and down payment amount, determines the home price

a buyer can afford.

Let's look at these 3 main qualifying categories -

Income

A person's documented monthly gross income,

based on her/his Federal tax returns and W-2,

1099, or K-1 earnings statements.

Some income tax deductions can be added back in to Adjusted Gross Income (such as depreciation and mortgage interest) while others must remain as deductions (unreimbursed business expenses on a 1040 for example) when calculating qualifying income.

Generally the more a person deducts, the less that can be used as qualifying income. If planning to buy a house in the next year or so, it may make sense to not take a few deductions, show more income, pay slightly more in taxes, and qualify for more house.

(Personal note to Realtors� - Since most of you earn commission income reported on a 1099, you are considered self-employed when qualifying for a mortgage.

When you file a Schedule C with your 1040 (as most of you already do), you deduct normal business expenses as operating expenses. Then when you want to finance property, we can add back in the depreciation taken along with the deduction for partial business use of your residence.)

Check with your CPA or tax pro for best practices.

Debt

Accounts the applicant is responsible

for paying each month.

This includes credit cards, car loans or leases, mortgages on other properties (with taxes and insurance), child support, student loans, and all other financial obligations. Most of these show up on the credit report.

Before applying for financing, buyers should pull their own credit reports to check for inaccuracies and errors.

Cash

Readily available money used to

complete the transaction.

Buyers need to pay their down payment along with closing expenses, the first full year's homeowners/hazard insurance premium, tax and insurance escrows, and local transfer taxes and recording fees at the closing table. This must be the buyer's own money from earnings and savings, not a loan from an outside source.

Gifts of down payment money from family members are allowed in many loan programs, and seller contributions or allowances to closing costs can help offset buyers being a little short on cash.

Different loan programs have different guidelines on this, so be sure your buyers explore all options.

Money from buyers at closing must be by bank wire transfer - NO actual cash, personal, or even certified checks. The closing title company or attorney sends instructions to buyers.

In PreApproval and qualifying, lenders verify the amount of buyers' liquid funds available for down payment and closing, along with the source of these funds.

When figuring out what the buyer's monthly housing expenses will be, we include the new property's :

- loan principal and interest
- property taxes

- homeowners / hazard insurance

          - community or building association dues

Then we include the other monthly recurring debts that we mentioned earlier and were verified on our lender's tri-merge credit report :

          - credit cards
          - car loans or leases
          - PITIA for other properties owned
          - student loans, child support, alimony, etc.

This gives us the borrower's total monthly debts, which we use to determine the DTI or Debt-To-Income ratio.

Total Monthly Debts / Usable Monthly Gross Income = DTI

Lower DTIs mean there is more income left each month after paying bills, so greater ability to pay a new mortgage along with those bills. Less risk to lenders.

Today, many lenders like to see overall DTI under 43%

Income and Debt must remain in balance for a buyer to be PreApproved or qualify...when either one changes, DTI also changes. Sometimes it doesn't take much of a change to push DTI past an allowable limit.

Same debt / more income = lower DTI

More debt / same income = higher DTI

Keep in mind that all 3 (Income, Debt, and Cash) contribute to qualifying. A buyer may have good income and low debt, yet if there isn't enough available cash for down payment and closing, that buyer may have difficulty qualifying.

There we are - a very brief overview of how a buyer's Income, Debts, and Cash all have to work together and contribute to loan qualifying.

Today's newsletter is also intended to reinforce the benefit of working with PreApproved buyers.

It's always better to address any issues and do some

balancing before we're faced with contract dates.

When you have buyers who want to use financing, have them call me early in the looking stages so they can be aware of the financing options and programs available to them.

Well-informed buyers make our trip to the closing table so much smoother.

Let me reinforce the trust

your buyer has placed in you! sm