Mortgage Underwriting Guidelines & DTI - (@Bill Gulley)

[Nicholas B.]

In another thread, @Bill Gulley and I had a brief discussion on underwriting guidelines. Rather than take that thread off topic, I created this one to hopefully further the discussion. The main contention was whether a lender will consider excessive availability of revolving credit (large open credit card limits) as a negative in calculating your ability to pay or DTI.

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Originally posted by @Bill Gulley:

I assume the credit underwriting you do is with insurance risks, I'd agree.

You can check fannie mae underwriting, if a credit card has a zero balance, and that account is still open, half the high credit amount that had been used is used to compute debt ratios. High credit outstanding within a year, say $5,000.00, at application it has a zero balance, say terms of that card are 3% of balance out standing, then it would be:

$2500 x 3% = $75.00 payment computed to the debt ratio.

This is because, under prudent LOAN underwriting, it is assumed if the account is open, it will be used. That is why I suggested to close accounts not used.

Lenders look at the ability to pay, not your ability to carry credit long term or create more credit. Now, the other side is the ability to carry credit is to other dealings, you have the debt and meet the obligations, like your insurance company, they don't care how much you make but they do want to see you paying everything as agreed and they don't like seeing you in a financial bind, that's an indication for making false claims.

We're talking loans for real estate here, at least I am. :)

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@Bill Gulley, I hope you'll take some time to discuss this as it is of great interest to me and you seem knowledgeable in this area. To clarify, I underwrite loans and sell insurance. I don't underwrite for an insurance company.

I researched the Fannie Mae guidelines a bit since I have no experience with this type of entity. I did find a list of guidelines at: https://www.fanniemae.com/content/guide/selling/b3... titled: B3-6-02: Debt-to-Income Ratios (09/29/2015)

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There is a specific section addressing this topic:

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Calculating Total Monthly Obligation

The total monthly obligation is the sum of the following:

• the monthly housing expense of the borrower's principal residence (or the qualifying payment amount if the subject mortgage loan is secured by the borrower's principal residence (see B3-6-03, Monthly Housing Expense));
• the qualifying payment amount if the subject mortgage loan is secured by a second home or investment property (see B3-6-04, Qualifying Payment Requirements);
• monthly payments on installment debts and other mortgage debts that extend beyond ten months;
• monthly payments on installment debts and other mortgage debts that extend ten months or less if the payments significantly affect the borrower

[Shaun Weekes]

If you have a credit card that has a zero balance and the credit limit is 10,000 or whatever this will not affect your DTI.

DTI is based on payments not your debt.

Fannie Mae used to make you close your c.c. account if it was being paid off through the loan. They recently changed this and now the account doesn't need to be paid off.

Example on DTI

Mr. Jones makes 10,000 a month gross and is a wage earner. He has the following debts:

Capital one card: Balance $10,756 Payment $202

Ford Motor Credit: Balance $33,987 Payment $309

H.E.L.O.C.: Balance $90,000 Total that can be drawn $100,000 (in this case the UW will calculate the payment based on $100,000) PAYMENT 400

New First Mortgage: $200,000 Payment $1500 (Including taxes and insurance)

Total DEBT: 344, 743 Total PAYMENTS: 2,411

In this case the DTI will be 5.11/24.11 now during the refinance you don't want to use any c.c's because it could affect your DU/LP findings. This is why good loan officers tell you not to buy, co sign or use any credit cards and if you can avoid using any reserves.

Just as a side not I think DTI ( debt to income ratio ) should be changed to PTI ( payments to income ratio)

I hope this helps and I speak about this briefly in my interview on the Joe Fairless Show earlier this year. The link is on my profile.

Have a great day.