Mortgage 101 | Debt to income ratio to buy a house
What is included and debt-to-income
ratio, and what debt-to-income ratio is needed to buy a house? We’re gonna cover
these two and some other mortgage 101 stuff today so stay tuned! Hey everybody its Mike Iwinski with Real People Realty I’m a realtor up here in
the northwest suburbs of Chicago. Welcome to my channel! I post new videos every
Thursday all about real estate in Chicago’s northwest burbs. If you haven’t
subscribed yet, Honestly, whatcha waiting for? Hit that subscribe button
now! Today we’re talking DTI and mortgage 101, but as you can tell, we’re on the road. I’m getting ready to pick up someone who is way more about this than
I do. Cup of coffee and a nice chilly day
should be a win. I’m not sure I got coffee in me though today, I had some coffee this morning so I got to get my apple
cider caramel sugar thing it’s too yummy to pass up. So you’re one of those
guys you order a “Venti” like you know what the sizes are all that stuff. I
guess I do know what the sizes are yeah I go to Starbucks far too often.
Yeah haven’t I haven’t been brainwashed on the Starbucks lingo so it’s usually
still a large. Yeah well so it’s funny… years ago I used to be that guy, and I
didn’t ever want to grab on I’m not gonna do it I’m not gonna say “Venti”. Is that the large? You’re gonna ruin me. I’m gonna end
up doing this now. Can I please have a venti caramel apple cider? Venti skim milk cappuccino. So I guess this is probably a good time to ask you to introduce yourself
and you know tell us a little bit about who you are and what you do Absolutely so my name is Richard Kimball I’m what Cross Country Mortgage and I’ve
been in the mortgage business for 30 years, with Cross Country for 8 and
I have a branch that I manage but more importantly and we still originate. We have a
the team and I like being involved in the origination process because we
still go to closings, meet with our customers and applications we still have
that satisfaction of seeing their face when they buy the house it’s really it’s
really cool. But that’s enjoyable for me, that’s who I am. Nice!
So I guess being the mortgage business for 30…30 years you said? Yeah I stopped
counting at 30 otherwise I age myself. So given all that, you probably can tell us a little bit
about DTI and pre-approval and some other mortgage 101 stuff. Absolutely.
Cool so let’s start with DTI. Tell me what is it? Let’s talk about DTI or debt-to-income ratio. Debt-to-income ratio essentially is made up of two numbers.
It’s the front end and the back end debt. to income ratio. The front end is based on
housing expenses. So housing expense is not just the mortgage payment that we
generate, but it’s the real estate taxes broken down into a monthly number,
it’s the homeowners insurance again broken down to a monthly number, PMI or
mortgage insurance, if in fact the client’s not putting down 20%, and then
lastly of course HOAs – homeowners association, if there is a homeowner’s
association. Condos, townhomes, exactly. So whatever the combined monthly total of that number is, that’s the front ratio
– of all the housing stuff – correct, all the housing stuff. So, that number is then divided by the gross monthly income.
Not the net monthly income, which is a common misunderstanding.
It’s the gross monthly income. We’ll get customers that call us and
say I take home $700 a week, that’s not the number we use. We’ll
use the $1000 they get before the taxes are taken out, and their
medical insurance and all that stuff, So, as an example, let’s say the housing
expense was a thousand bucks. So if their gross monthly income was four
thousand we’re just taking that four thousand dividing it into the one
thousand and essentially it’s 25% It’s a great number, they would
likely qualify on that number However, as lenders we look at the second
number. The second number is total debt-to-income ratio or total debt. Now there’s
some confusion on what that debt really comprises. The debt essentially
is car payments, student loans, credit cards, and of course any alimony child
support. Pretty much anything that shows up on the credit report plus alimony child support. So basically the second part of that is your expenses, so
to speak, right? Right, like you said, credit cards, car payments, do things like cell phone play into that? No, cell phone, utilities do not
traditionally play in. So what’s a maximum DTI that you’re looking for. Yeah so the
second ratio I think for somebody who’s watching this video or working
on some things at home I think they want to target to 45% so that –
for everything – for everything. So again, everything: car payments, credit cards,
student loans: 45%. Can we lend over 45? Certainly,
it’s not a guarantee though that you’re gonna get that approval. A lot of
approvals they’re done with what is called automated underwriting, and they
factor the whole picture, and so some people might fly at 50 percent Mike but
some may not. I would say if somebody’s again watching our video here
they want to use 45 as a good target number. What’s a
pre-approval how does it come into this? Pre-approval is really important. There’s two different
types of approvals out there – that are most commonly used. There’s what they
call a pre-qualification and pre-qualification could be as simple
as this: let’s say you’re the loan officer Mike and I call you up and I say
“hey Mike, I make $100,000 a year, I’m putting down 30%, and my credit’s
750. Do I qualify? Sure, sounds like you qualify. Because again you’re making $100,000, you’re putting down 30%, you got great credit.
It’s a pre-qualification, it’s not worth anything more. So they’re not giving you any paperwork of any kind, you’re not credit
checking anything in a pre-qual. Not at all. So a pre-approval
is another animal. Pre-approval somebody has applied online or they’ve talked to a
loan officer, mortgage professional, and they’ve given enough information: address, social, date of birth job, that information is then taken and
we run credit. After the credit’s run if everything looks good we run what’s
called automated underwriting and automated underwriting will generate an
approval. We will then issue a pre-approval letter and that’s pretty
standard actually. But that letter’s much more significant in the transaction
than just a pre-qualification. Sounds like it’s a whole lot more valuable, especially to a
seller. It is valuable to a seller. In a tight inventory market I think a seller wants
some assurances that this buyer can close. So what are down payment options like
these days? I hear a lot of people say that you have to have 20% down, you do,
you don’t, tell me about that. FHA only requires 3.5% down. Conventionally, you can do it with as
little as 3% down, and if you’re a veteran it’s a blessing and all of our veterans should be honored. It’s zero, right? Yes it’s zero. On top of that, there’s also downpayment assistance
that’s provided from the state of Illinois, where they’re providing, at the
cheapest level, they’ll provide 4% of the purchase price, which is
forgivable, they don’t even have to repay that to the state. So forgivable meaning is that a grant?
It is, it’s a grant – a grant that you can use for a down payment?
Correct. If you liked this video, you should definitely check out these two.
One is about earnest money, and the other is about the home buying process. Enjoy!