The Lending Coach

Coaching and teaching - many through the mortgage process and others on the field

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Mortgage Qualification: What is a Debt-to-Income Ratio and Why is it Important?

Debt-to-Income Ratio (or DTI) is a personal finance measure that compares the amount of debt you have to your overall income.

Mortgage lenders use it as a way to measure your ability to manage the payments you make each month and repay the money you have borrowed.

When you apply for a mortgage, you’ll need to meet maximum DTI requirements so your lender knows you’re not taking on more debt than you can handle.

Lenders prefer borrowers with a lower DTI because that indicates less risk that you’ll default on your loan. 

A mortgage debt-to-income ratio leaves out monthly expenses such as food, utilities, transportation costs and health insurance.  Although lenders may not consider these expenses and may approve you, it’s important not to borrow more than you’re comfortable paying.

So keep these additional obligations in mind as you evaluate how much you’re willing to pay each month.

Understanding Debt-to-Income Ratio 

A low debt-to-income ratio demonstrates a good balance between debt and income. In general, the lower the percentage, the better the chance you will be able to get the loan or line of credit you want.

On the contrary, a high debt-to-income ratio signals that you may have too much debt for the income you have, and lenders view this as a signal that you would be unable to take on any additional obligations.

To a lender, someone with a high debt-to-income ratio can’t afford to take on any additional debt…and if the borrower defaults on his mortgage loan, the lender would lose money.

How High Can You Go?

Evidence from studies of mortgage loans suggest that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments. A 43 percent debt-to-income ratio is important because, in most cases, that is the highest ratio a borrower can have and still qualify for a loan backed by Fannie Mae and Freddie Mac.

Larger lenders may still make a mortgage loan if your debt-to-income ratio is more than 43 percent, but they will have to make a reasonable, good-faith effort, following regulatory rules, to determine that you have the ability to repay the loan.

Calculating Debt-to-Income Ratio 

To calculate your debt-to-income ratio, add up your total recurring monthly obligations (such as mortgage, student loans, auto loans, child support, and credit card payments), and divide by your gross monthly income (the amount you earn each month before taxes and other deductions are taken out).

For example, assume you pay $1,200 for your mortgage, $400 for your car, and $400 for the rest of your debts each month. Your monthly debt payments would be as follows:

  • $1,200 + $400 + $400 = $2,000

If your gross income for the month is $6,000, your debt-to-income ratio would be 33% ($2,000 / $6,000 = 0.33). But if your gross income for the month was lower, say $5,000, your debt-to-income ratio would be 40% ($2,000 / $5,000 = 0.4).

In Conclusion

Your debt-to-income ratio (DTI) – how much you pay in liabilities each month compared to your gross monthly income – is a key factor when it comes to qualifying for a mortgage. Your DTI helps lenders gauge how risky you’ll be as a borrower.

Keeping your debt-to-income ratio low can help you qualify for a home loan and pave the way for other borrowing opportunities. It can also give you the peace of mind that comes from handling your finances responsibly.

Please do reach out to me for more, as it would by my pleasure to help you qualify for a mortgage!

You can find out more here:

A Credit Repair Primer – Removing Items Yourself or Hiring a Pro

Since credit scores have become such an integral part of our financial lives, it pays to keep track of yours and understand how your actions dictate the numbers. You should absolutely build, defend and take advantage of great credit regardless of your age or income.

Yet a lot of people still have doubts as to how credit scores work and why it’s important to make sure the information contained in your credit report is correct.

You can leverage high scores into great deals — on loans, credit cards, insurance premiums, apartments and cell phone plans. Bad scores can hammer you into missing out or paying more.

Money Magazine Article

I’m linking to an article from Money Magazine called How To Get Items Removed From Your Credit Report.

The article goes into great detail on on how to remove items from your credit report – as well as a specific explanation on the credit reporting system and what goes into it.  I highly recommend that you take a look at it.

One of their recommendations is to hire a professional credit repair service – and I really believe that can be a good idea.

Money Magazine writes “when looking at the lifetime cost of bad credit, or if your report is riddled with inaccuracies, paying a reputable company…to help repair your credit is often a reasonable solution.”

Credit repair services can help you with the following items:

  •     Cleaning up credit report errors
  •     Disputing inaccurate negative entries
  •     Creditor negotiations
The Debt Rescue Network – Jennifer Amsbaugh

If you need to improve your credit score to qualify for a mortgage or earn a lower interest rate, I recommend that you reach out to Jennifer Amsbaugh at DNS and see what she can do. 

Their program is designed for individuals and families struggling to pay debts while saving money for daily expenses at the same time. They have a particular methodology that has proven to be effective in improving scores.

Jennifer Amsbaugh, Certified Debt Affiliate, Debt Negotiation Services 

Why Is Credit So Important?

It seems like those with good credit catch all the breaks when it comes to getting lines of credit. It’s easier for them to qualify, and they get lower interest rates.

Well, there’s a pretty good reason for it.

A person that has good credit has a low statistical probability of defaulting on a loan. Therefore, they are given a lower interest rate. A person with a lower credit score has a much higher probability of defaulting, therefore they are charged a much higher interest rate to cover the losses incurred by lenders by those who do default.

At the very least, your score will affect the type of interest you’ll pay on any type of loan, from home mortgages to credit cards. At most, a low credit score will seriously impact your ability to purchase a house or a car.

If you have more questions about your credit and how it impacts your ability to finance a home, please do reach out to me, as it would be my pleasure to help!

A Unique Home Buying Opportunity

Is now a good time to buy a home?

It might be — but not for the reasons you might initially think.

These really are most unusual times, especially when you consider the Covid-19 pandemic…but really good home buying opportunities are out there, to be sure.

Right now, buyer demand is down, as sellers just aren’t seeing the multitudes of offers they had a little over a month ago. A few have even taken their homes off the market, but the majority are looking to sell now and are forced to consider offers from a smaller buyer pool.

After Covid-19

When the coronavirus pandemic subsides, home prices could very well be higher, and financing could be harder to come by, so buyers should try to find deals now, if they are able.

So says Barbara Corcoran, founder of the Corcoran Group, a New York-based residential brokerage.

“If you’re smart enough to attack the market as an educated consumer, and get out there, and make a bid on a sweetheart deal, you’re gonna be the smartest guy. And everybody’s going to applaud you six months from now,” Corcoran said on Wednesday.

You can find the entire article here…

The Key Issue

The market could very soon favor sellers even more than it did previously. Many sellers have pulled their homes off of the market, which will further limit inventory and drive prices higher. It’s just simple supply and demand.

On top of that, buyers will have more competition once consumers start buying again.

“The reality is [that] when they [buyers] come to the market, everyone’s going to be in the market at the same time, they’re going to pay more for the home then than they’re going to pay now,” said Corcoran. 

While the current lock down is making buying real estate difficult, buyers should still keep an eye on their local market so they can recognize a good deal when they see it, Corcoran said.

To identify good deals, buyers should learn about their local market, monitor sales data and find the right real estate agent.

“Because then they’re [the educated buyer] in the position to actually recognize a sweetheart deal when they see it. And if they pounce on it, they’re going to get the deal of a lifetime,” said Corcoran.

“Every real estate cycle that has gone up and down, the deals weren’t made in the down cycles, nor in the up cycles. They were always made in the times where there’s the greatest uncertainty where everybody’s guessing.”

In Conclusion

Now really is a good time to act, if you are able. Do reach out to me if you would like some help with financing – and I’d be glad to point you in the direction of the right real estate agent, as well!

Mortgage Forbearance, Covid-19, and the CARES Act

The Covid-19 Coronavirus has led to some challenging times for all of us.

For homeowners and business owners, the US Government has created the CARES Act to assist those whose income may have been adversely impacted by the coronavirus. 

One of the components of the CARES Act is the possibility of mortgage forbearance.

Please keep in mind that forbearance is designed to help those as a measure of last resort.  It is not a free pass and may have serious consequences.

My advice is that if you can pay your mortgage, make sure and do it. This is not a time to try to take advantage of an untested program that might actually hurt you down the line.

Again, unless you are facing an immediate issue, pay your mortgage on time.

What is Forbearance?

Forbearance is often misinterpreted.  And while it is intended to help, it can have some dangerous repercussions.  Many people are mistakenly thinking that forbearance equals forgiveness.  It does not.

To be clear, forbearance means that the payments will be suspended for a short period of time, initially up to 6 months, but will need to be caught up when the forbearance period is over.

I highly recommend that you go to the Consumer Finance Protection Bureau’s (CFBP) site here… their “Guide to Coronavirus Mortgage Relief Options” has s good deal of information and advice.

One way to think about forbearance is when you buy something at a furniture store that offers “no payments” for 3 months.  You still must pay for the furniture…the payments are just deferred.

But mortgage forbearance is even worse if a borrower has dug themselves in a deep hole and can’t catch up.  Should this happen, the lender could enforce their right to be paid, which may cause the borrower to be foreclosed upon.  They could lose all the equity in their home in the process.

How The Process Is Working Today

What’s being reported is that lenders and servicers will require three months’ worth of payments – plus the current month – once that forbearance period is up.

Per Jessica Menton’s story the USA Today:Some homeowners say Wells Fargo, Bank of America and Chase have told them they have to repay those postponed payments – known as forbearance – in a lump sum once three months are up.

“The problem with the CARES Act is that it doesn’t make clear how borrowers pay back the money during a forbearance period,” says Shamus Roller, executive director at National Housing Law Project, a nonprofit legal advocacy center.

There’s a chance that something could go wrong in that process,” he says, “and it requires a lot of interacting with servicers that are overburdened with calls.”

How to Start the Process

Per the CFPB:


Call your servicer.

You may need to stay on the phone for a while before the servicer is able to take your call.

Loan servicers are experiencing a high call volume and are also impacted by the pandemic, so may be working with staffing and technology limitations.

Have your account number handy.

Depending on your situation, I may be able to help by eliminating your debts, lowering your payment, and giving you a cash cushion during these turbulent times. Don’t hesitate to reach out to me, as it would be my pleasure to assist you!

Housing Market Forecast in Today’s Coronavirus Economy

Everyone is rightly concerned about the Coronavirus – as well as its impact on the economy and on housing.

But before the Coronavirus took hold, housing was very strong, with both new construction data and existing home sales at 13-year highs.

Believe it or not, we expect the strength to resume in housing when things get better, and I’m quite confident they will get better!

Sure, there might be a slower period as we practice social distancing, but most experts believe that when the economy comes back, it’s going to come back strong.

Did you know affordability is actually improving in the United States? You can find out more on that here…

In addition to that, homes are valued quite fairly; they’re not overpriced…and home appreciation has been steady and sustainable (more on that here…)

Look at this metric: when you take annual rents, the value of a home is about 17 times what annual rents would be. The historical average is 16, so we’re right there.

The peak was 24 times annual rents and we’re nowhere near that level! And if you take a look at replacement costs, home values are 1.59 times the cost to replace the home. The 40-year average is 1.58. It’s nowhere near the peak of roughly 2.

We can expect housing to come back very strong and this may be a great opportunity to buy that home you were looking for and benefit from it well into the future.

Please do reach out to me for more information and to set up your strategy!

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