Topic: Mortgage Underwriting Processes

Ling and Archer $(2021)$ briefly discuss the lender$$s mortgage loan decisions in terms of underwriting on pages $295-298,$ and one term they explain is debt$-$to$-$income $($DTI$).$ The DTI is commonly used in consumer lending to determine, truly, if the applicant has the ability to cash flow when adding in a new monthly debt payment.

The DTI sums the total amount of monthly debt payments, and divides the sum of those monthly payments by gross monthly income.

For example, if I have a $$1,000$ monthly mortgage payment, a $$300$ student loan payment, a $$300$ car payment, and $$200$ in credit card payments, the sum of the monthly debt payments is $$1,800.$ Notice that this does not include all monthly payments, such as a cell phone, groceries, cable bill, etc., only required debt payments.

In this instance, your monthly gross income $($before taxes are taken out$)$ is $$3,500,$ which equates to $$42,000$ annually.

To calculate DTI, you take the sum of monthly debt payments divided by the monthly gross income.

$$1,800/$ $$3,500=\mathrm{.}5142,$ or $51\mathrm{.}42\%$ debt to income. This tells the underwriters that from your income, $51\mathrm{.}42\%$ automatically goes towards your required monthly debts.

Most banks have a DTI threshold between $40\%-45\%.$ So$,$ in this situation, if you were looking to take out additional debt $($maybe a pipe broke and you need to take out a short$-$term loan to fix it$,$ or your washer and dryer need replaced, or your car suddenly needed major auto repairs... life happens, right?!$),$ you would automatically be declined a loan because of being over the maximum DTI threshold of $40-45\%.$

Part $1$ Assignment Instructions:

Considering all of the information given above, do some research regarding the future career you are pursuing and the area you are wanting to live in$.$ Explain the following:

The area or location you hope to live in$,$ and the cost of a $2-,3-$ or $4-$bedroom home you would like to buy.

This will require going to a realtor website and finding a home you$$re interested in$.$ Take a screenshot or snippet of the home information from the realtor website.

Use a mortgage calculator $($search the web$)$ to calculate what the minimum payment would be$.$

This may also require additional research to determine the average annual property taxes in the city$/$location you are wanting to live in$.$

You will also need to determine the average annual cost of home$-$owners insurance.

Use a $7\%$ mortgage loan rate.

Complete this with a $30-$year term, and a $15-$year term, and provide screen shots of both.

Find the average wage for the job you hope to pursue in that city$/$location$/$county$.$

Remember that if you are just graduating college, you will more than likely be coming in on the lower$-$end of the salary or pay scale.

Consider any debt you may have at that time, hypothetically. It may be student loan debt, it may be debt for a vehicle or other loan payment, it may be a monthly credit card payment $($even if you pay your credit cards off in full each month, there would be a required minimum payment in the event you were not able to pay it off$).$ Be realistic.

Compute your DTI before the calculated mortgage payment with monthly rent of $$750/$month$.$ Be sure to show how you got this figure.

Then, compute your DTI using the $30-$year mortgage payment. Be sure to show how you got this figure.

Then, compute your DTI using the $15-$year mortgage payment. Be sure to show how you got this figure.

Reflecting on this information and reviewing the loan payments$/$DTI information, how realistic were your expectations before completing this assignment? Why were they realistic, or why not?