Are you a first time home buyer wondering how much home you can afford to purchase? How do lenders calculate how much I qualify for when buying a house? What goes into my debt to income ratio? How does a lender determine how much house I can afford to buy? In this episode, we discuss Debt To Income (DTI) in length to help you understand how a lender preapproves along with giving you some examples of how much income you would need at different price points while we help you become The Educated HomeBuyer.
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[00:00:00] Jeb Smith, Huntington Beach Realtor: The number one question we get when it comes to buying a home is, do I make enough money to qualify? How much do I qualify for? What’s the monthly payment going to be? So in today’s episode, we’re gonna dive into debt to income, what it is, how it’s used in underwriting, and how it affects your ability to qualify.
Josh, where do you wanna start?
[00:00:25] Josh Lewis, California Mortgage Broker: Well, we’re starting here, or we’re having this episode and covering this topic. We have someone actually during the live show last week, had reached out and said, Hey, which episode to the podcast did you guys covered that? The income ratio? And your response was, “Well, that’s boring. No one wants to hear that.”
And I said, “well, they don’t, but they want to know. Do I qualify? How much income does it take to qualify for homes in my area?” Whether you’re in a lower priced area with a three 50 entry level priced home or a higher priced area with a seven 50 entry level priced home, how much money do you have to make? How does your debts impact that?
Jeb, one of the big things that I can say that I get, people reach out to me and they say, “Hey, I make this much, and my debt to income is this much, rarely are they correct.” they’re not crazy, they’re not wrong. They have an idea what they make. What we’re gonna talk about today is what is qualifying income?
Not what you made last year, not what you think you made, what is an underwriter looking at? We’re not gonna do a, a full-blown, deep, deep, deep dive cuz that could be a, an episode in and of itself. But we’re gonna cover what an underwriter is looking at to determine your income, which of your debts they use, and then we’re gonna go through all the different loan programs and how they vary in terms of what is allowable for a debt to income ratio, how it varies when you have an automated approval versus a manual underwrite.
If you’re going for a manual underwrite, you don’t qualify with the automated to underwriting systems. And then we’re gonna close out by saying how much money do you have to make or does your household have to make in terms of qualifying income to buy homes at a couple different price points.
[00:02:01] Jeb Smith, Huntington Beach Realtor: I think a lot of people are gonna really like that part where we give examples of price points, what payments are associated with it, what incomes you need. So just make sure you stick around to the end where you get that. But Josh, let’s start by talking about what debt to income is.
Let’s explain it in very layman terms, just so we’re all on the same page before we dive into the ins and outs of each part of it. If.[00:03:00] It’s important to know anybody that’s listening at home. When we’re talking debt to income, we are literally talking about the things that show up on your credit report. We’re not talking about how much you’ve spend in childcare or how much you spend on the weekends taking your kids to the movies or at the grocery store, because those are expenses and those are things that you need to factor into your budget when determining how much you can truly afford.
But when the lender is accounting for your debt to income ratio, they’re literally taking the debts that report on your credit report, those monthly payments, they’re adding those to whatever your housing expenses are going to be. And that in turn is going to give them the debt to income ratio. And an amount of maybe you qualify, maybe you don’t.
[00:03:45] Josh Lewis, California Mortgage Broker: Jeb, let’s make a distinction here. What we just talked about is your total debt to income ratio, your debts, plus your new proposed housing payment divided by your income. And for the most part, that’s the only one we need.
FHA does still take into account a housing to income ratio, plus the total debt to income ratio. So a housing to income ratio excludes everything except for your principal interest, taxes, insurance, HOA. Anything that goes into your monthly housing payment. And some loan programs do have a requirement that your housing to income ratio can only be a max and then add in your other debts and there’s a total debt to income ratio is gonna be a max.
But we’re gonna go through that. Just wanted to clarify that we do have two debt to income ratios there. So the most important thing, Jeb, is income. What is your income? I can give you an example. Right now at the beginning of the year, I always have several potential clients wanting to get pre-approved and they say, “Hey, we wanna wait until we get our tax return done. Cause we wanna make sure we use our current income.”
And, other than for self-employed people, that’s not the way underwriters look at it. They are going to determine what your current, today qualifying income is, and the specific client that I’m thinking of, both her and her husband, one was salary and one was an hourly rate.
And they both had several raises in the last 12 months. So if we look at W2 for last year, it was gonna understate their income. What an underwriter is looking at today is what is the income today that I know is going to continue going forward? So fixed income, like a salary that you got a raise of a thousand dollars a month yesterday, and I have a pay stub today showing it, I can use it.
If you got a raise from $25 an hour to $32 an hour yesterday, and I have a pay stub, I can use it. I have to have a history of working full-time in the 40 hours. But those are generally fixed income. Variable stuff… overtime, commission, bonuses, those we have to average over the last two years and you filing your tax return don’t make much of a difference.
But this is where it comes in where Jeb, I have clients call and tell me, “Hey, I make this much money.” And that may be what you’re gonna make going forward, but it’s not necessarily your qualifying income. So for what we’re going to do, I am trying to get a maximum number that an underwriter cannot argue with, that we [00:06:00] know is documented and likely to continue going forward.
So when we’re doing your pre-approval and asking for different forms of documentation, it can be really simple for people with fixed income. It gets more complex for those of you with different forms of variable income. And again, that could be a whole nother show talking about variable income and how we document it.
If you’re self-employed, It’s gonna come down to one or two years tax returns. FHA, VA, USDA are always gonna require two years. Conventional, a lot of the time we can get away with one year. So, in that instance, someone may wanna wait until their tax filing. If last year the business made $80,000 and this year it made $180,000. Let’s get that tax return done.
But for the most part, that’s what my job is, is to gather the documentation, analyze it the way the underwriter is going to, and go back with you, the borrower and say, “okay, what I’m coming up with is $9,855, and here is how it breaks down. Do you see anything different?” And sometimes the borrower’s gonna come back and go, “well, no, it’s actually this.”
I go, “I get it. Here’s why the underwriter calculates it that way.” So when we’re figuring out what you qualify for, We want to arrive at total household qualifying income, and we have to fall back on what the underwriting guidelines are so that we have a supportable, sustainable, accurate number that no underwriter is going to argue with.
[00:07:17] Jeb Smith, Huntington Beach Realtor: Understood. So is it the same for rental income? How about stocks, dividends, things that you’re receiving from, maybe retirement, pension, any of that stuff? RSUs, if you were lucky enough to get RSU’s in a company. How is all of that calculated?
[00:07:33] Josh Lewis, California Mortgage Broker: So, of course, Jeb, you did a fun job of throwing 14 different things at me. They’re all treated slightly differently, but things like dividend income, interest income, we need to average them. So we have to show what you’ve received. The automated underwriting system is gonna come back, depending on the loan program, it may tell us one year or two years of tax returns, and we’re gonna have to show what you’ve paid taxes on for those the last few years.
RSU income, again, is a whole nother show in and of itself. For the most part, it’s usable. We have to have a history of it. You have to have vested, and we have to have access to it. Sometimes if you’re in a lockup period, and we can’t touch that, a lender is not gonna let you use that for qualifying if you’re not able to access it to help you make the monthly payment.
But for the most part, RSUs are definitely usable. You had a very good point there In terms of pension income, retirement income, disability income, those are documented with an awards letter and then documenting that you’re receiving that pay every month. If it is something that’s not taxable, like VA disability pay, not taxable, we can gross that up.
We can give you extra credit for it. And that’s probably a really important point that you and I should make here, Jeb. We are always talking about gross income, not what gets put into your bank at the end of the week or the end of the two week pay period, what you were actually paid before your deductions come out of that.
Underwriters are always working off of gross income. So if we have something that’s not taxed like social security, VA disability, we will gross it up and give you extra credit for that income [00:09:00] to make it similar to someone else’s taxable income.
[00:09:03] Jeb Smith, Huntington Beach Realtor: Yeah, I don’t know if you guys are catching on here, but income can be very, very difficult to calculate. Unless you’re, just a W2 wage earner and there’s no changes, nothing, then you need a professional, you need an expert to calculate this income. And you know, it’s why it’s important to make sure you know who you’re working with and make sure you’re getting a good referral of somebody that you trust that has experience.
Because if income is calculated incorrectly from the start, then your entire pre-approval is off from the very get-go, right? It’s not accurate, which in turn could put you in a bad position if you go out and make offers on property, and then don’t qualify. So just make sure you’re working with somebody that understands the business, a knowledgeable expert.
If you don’t have somebody, there’s a link in the description below where we can refer you to somebody we know, like, and trust that can guide you through that process. But I just wanna make sure you’re understanding. Cuz I, I deal with this day in and day out and then I hear Josh talking about it on the other side and I think how complicated it is for somebody that’s been doing it 20, 25 years in the business and then there’s a lot of people out there running around that have been doing it for six months, calling themselves experts. So just make sure you know who you’re working with.
[00:10:14] Josh Lewis, California Mortgage Broker: Jeb, I would say the biggest proportion of problems in transactions, transactions that go sideways after a preapproval’s been issued, come down to income. I wouldn’t say it’s more than 50%, but it’s a plurality of the problems that you have when you get later into a transaction.
When we have people that reach out to us, either you or me through our websites, online, and they say, “I’m supposed to close in 10 days, and they’re telling me I don’t make enough to qualify.”
Well, if there’s questions, we need to answer those up front. You know, Jeb, we had someone get upset with me. I showed you like six weeks ago. ” I went to an open house this weekend and the Realtor told me I didn’t need to give you any of that stuff to get pre-approved.”
And I said, “well, you have variable income. If you don’t give that to me, I can pre-qualify you. I can tell you what I think you make, but you gave us everything so we can have a rock solid pre-approval. So I don’t know why a realtor would be telling you that you didn’t need to do that to determine what you can go out and make offers on, but there’s a lot of misinformation.”
So if someone just asked for a pay stub or a pay stub and a w2, unless you have a very simple situation, you’re opening yourself up to the possibility of issues and problems later on. So do yourself a favor, open the kimono, give ’em all the information and let ’em search for problems ahead of time so you don’t have headaches later on in the process.
[00:11:25] Jeb Smith, Huntington Beach Realtor: All right. Speaking of opening the kimono, let’s talk about debts. Debts are another part of this equation, and debts, most of them are gonna report on your credit report. Occasionally, there can be some things factored in Josh, that will add to our conversation here in just a moment.
Um, child support, alimony, some things that may not be reporting on there, but typically speaking, what shows on your credit report is what’s going to be used in that primary calculation. And what are we talking about there?
[00:11:53] Josh Lewis, California Mortgage Broker: Car loans, student loans and let’s circle back to that, that’s an important one that we will do a full [00:12:00] episode on. Credit cards, installment loans. If you do a consolidation loan or you take a loan to pay off some debt or take a vacation. The difference between an installment loan and a revolving or a credit card is you have X number of fixed payments and it will pay that off. Timeshares will show up on there. We can have issues with collections and judgements.
Sometimes we have to make a payment for those to account for them. Again, outside the scope of what we’re talking about. But that’s what we’re looking for on the credit report to see if any of those exist. In the past, one of the big things that had been, sort of a gotcha for loan officers that just wanna pull the credit and quickly look at the credit score and import the debts into their software and or send it out to the automated underwriting system.
We had an issue coming out of 2010, 2011, 2012, when there were a lot of bankruptcies. Mortgages will no longer report on your credit report once you have included them in a bankruptcy. If you keep the house, you’re gonna keep making payments, but they don’t report there.
So a lot of times we would have an unknown second mortgage that never reported. Now the big one, Jeb, that we’ve had the last few years, post Cares Act all federal student loans are in forbearance. You didn’t ask for it. You may not need it, but you have it. So on your credit report shows $0 payment.
Depending on the loan program. Well, not depending on the loan program. It’s never okay to show a payment in forbearance because we know that at some point there’s going to be a payment. Every loan program has different guidelines and options for how we calculate that. It’s generally anywhere from a half percent of the balance to 1% of the balance.
Or if you have an income-based repayment, we can go back to the servicer and get documentation of what your income-based repayment would be if you were making payments. So those are the big things that show up there. You already hit on some big ones that don’t show up or can not show up there.
If you go through a divorce and you are paying child support or alimony and you keep up on it and it’s not garnished, probably not gonna show on your credit report. It can show on your credit report. I’m dealing with a borrower right now. He’s got child support for two kids and both of those amounts show up on there because they are garnished and taken through the county and makes those payments.
So if it’s not there, we need to be aware of it. On your loan application, there’s a question. Are you obligated to pay alimony, child support, or separate maintenance? If so, we need to document that. We need to divorce decree. We need to show your paying it.
Going back to the income section, Jeb, if you’re receiving alimony or child support, we may have to document how old the kids are. They need to be under 15 so that it’s gonna continue for more than three years. If you’re receiving alimony or child support, we have to show that your ex-spouse is actually paying it. We can’t just show that they’re required to. We make sure they actually have been paying it to you.
Let’s talk about Jeb. What doesn’t show up on your credit report and that we don’t count? Utilities, you know, your gas and electric bill at your apartment. Your insurance, many types of insurance that you may have. None of those are going to show up and be included in our debt to income ratio.
[00:14:53] Jeb Smith, Huntington Beach Realtor: Does your Only Fans subscription show up on the credit report?
It should not. I believe it will get picked up in [00:15:00] Experian Boost.
So, true story. Someone told me recently that, they had to send their bank statements over to the loan officer for something, and the person was worried that somehow his, because him and the spouse, had separate banking statements, and he had to send his account statements over and he was afraid that some of his subscription services were gonna get out to the other person.
I forget who told me the story, but I was. Find that very interesting.
[00:15:25] Josh Lewis, California Mortgage Broker: Well, not debt to income issue related, but in terms of qualifying a borrower, I did talk to a fellow loan officer that had a very famous Only Fans performer who bought a multimillion dollar home here in Orange County last year, and said it was shocking the level of income that she made from her page.
[00:15:43] Jeb Smith, Huntington Beach Realtor: Well, nevertheless, we got off track there, guys. Sorry about that. So we talked about the things that were not included, utilities, insurance, subscriptions. So Josh, why don’t we give a quick example of debt to income, how to calculate the basics of it, then we can talk about some loan programs, how they calculate it, and more importantly, what people are probably waiting on, let’s use it on some purchase prices, how much income you need, all of that good stuff.
[00:16:07] Josh Lewis, California Mortgage Broker: Absolutely. So let’s just tie this together. Let’s say the underwriter, the loan officer has gone through and calculated your household total qualifying income is $10,000 a month. Makes our ratios here super easy.
You’re looking at a payment for the proposed home that you’re purchasing, all in taxes, insurance association, dues, if any $3 365. We pull your credit, there’s a car payment, a couple credit cards, a little student loan, $614 there. So that amounts to $3,979 of debt against $10,000 of income. Gives us a total debt to income ratio, 39.79%.
The housing to income ratio, if it’s important for the program that you are looking to qualify for is 33.65. It’s that $3,365 against the $10,000 of income.
[00:16:52] Jeb Smith, Huntington Beach Realtor: Mm-hmm.
[00:16:52] Josh Lewis, California Mortgage Broker: So fairly simple. Arriving at the numbers accurately is not necessarily simple. Once we have income and debts accurately calculated, the ratio is a very simple calculation that, most of our third graders could accomplish for us.
[00:17:05] Jeb Smith, Huntington Beach Realtor: Yeah. So basically, I understand what Josh said easily because I do this all the time, but essentially you take the mortgage payment that you’re going to have associated with whatever property you’re buying, right? The mortgage payment, you’re adding the property taxes to that, you’re adding any insurance associated with that. If you have mortgage insurance, that’s part of it. If there’s an hoa, that’s part of it.
So you take that total housing expense and then you add things like car payments, credit cards, student loans, the things that Josh mentioned earlier. And in this scenario, we get $614 added on top. Gives you that total debt to income ratio, which at a 39%, Josh, you should be pretty much good with any loan program.
But let’s talk about it. Let’s talk about it when it comes down to loan program, how they calculate it and then give some examples.
[00:17:50] Josh Lewis, California Mortgage Broker: We’re gonna make this sound really simple. It is not as simple as it is going to come across here. And the reason why I say that, you can say that with the right people, it is with your words, regulars.
I’ll explain it to you [00:18:00] while you’re going through it with your example present there for them. But we’re gonna start with automated underwriting. 90% plus of loans will go through with an automated underwrite, and nearly every loan program will allow more aggressive ratios with an automated underwrite.
Now the problem is this is a total black box. I can have two borrowers with the same debt to income ratio, one approved, one not approved. And the reason can be higher loan to value, lower credit score, less reserves in the bank after the transaction closes. We can guess, but we don’t know exactly why this is, so what we’re going through here is what are the maximums under automated underwriting.
So if Fannie Mae comes out and tells you 50% is our maximum. They also make a note that it’s likely lower for cash out refinances, high LTV loans. It’s likely to be lower if you have a low credit score. All of those things are likely to mean you don’t get to go to 50%. But for a perfect 800 credit score borrower with, you know, a hundred thousand dollars in the bank after they close, we can generally go to 50% with an automated underwrite.
[00:19:03] Jeb Smith, Huntington Beach Realtor: So Josh, I want to interrupt you real quick. Yeah. So when you’re looking online, for example, and I. Conventional loans, a lot of times it’ll tell me that the max qualifying ratio might be 43% or whatever, 36 over 43 or whatever that number is. You just said it’s 50. Okay, so why, why is there a difference there?
[00:19:25] Josh Lewis, California Mortgage Broker: Because the automated underwriting systems, what you’re saying are, are looking at everything. So it’s garbage in, garbage out. But assuming I or the underwriter have calculated everything accurately, when we run it through the system, that algorithm has looked at millions of loans and it is comfortable with the risk level that is higher than the manual underwrite.
So when you’re seeing these old school ratios, which we’re gonna talk about, we’re gonna go through the manual underwriting ratios here in a second. But like I said, more than 90% of loans go through an automated underwriting system and are therefore generally eligible for higher debt to income ratios.
[00:19:58] Jeb Smith, Huntington Beach Realtor: Fair enough. Good stuff. So we talked about Fannie Mae being at 50%. Uh, Freddy is the same?
[00:20:04] Josh Lewis, California Mortgage Broker: They don’t publish a maximum, but I can tell you in reality, I’ve got loans approved up to 50. Never got one approved over 50. I shouldn’t say never, because this vastly changed. After the meltdown in 2007, 2008. We used to be able to get loans approved at 64, 65% debt to income ratios.
And people hear that and they go, that’s crazy. Say, well, that was generally an 800 credit score borrower with a low. Loan to value rate and term refinance, where we’re taking ’em from a six and a half percent rate to a 5%. We’re lowering their payment. They’ve already shown they can make this payment.
We’re not taking any cash out, not putting any additional risk on the lender and lowering it. But even at that 50% hard and fast on all conventional loans, you’re never going to be able to go over that. And I shouldn’t say that because Freddie Mac has an interesting quirk. They round on their ratios. So we can go to a 50.49 for a well-qualified borrower. They will round that down to 50%.
And believe it or not, in a tough market like this with higher interest rates, higher home prices, [00:21:00] we need that occasionally.
FHA doesn’t publish their maximum, but you talk to any loan officer who does a lot of loans and puts ’em through. They’ll tell you either 47 over 57, so 47% housing to income ratio or 57% total debt to income ratio once we add in all your debts. The reality is it’s 46.99 over 56.99, 47 and 57 are the actual breaking points there.
VA, we have no maximum with a big if here. If you exceed 20% of the residual income guidelines. VA has a unique qualification, a guideline that they go through that says to some of the things that we didn’t account for in your credit report, your utilities, childcare, all of that goes into that calculation.
If you exceed those guidelines by 20%, you can go to a very high income ratio. We’ve talked about it here on the show. Jeb, you and I had one in the very high sixties. I’ve heard loan officers have closed one in the low seventies, so there’s no published max, but I don’t know if you go much above 70%, that you could meet that threshold of exceeding the residual income by 20%. So somewhere in the 70% range.
USDA is the same thing, they don’t publish a maximum ratio as long as you get accept findings. If we had a USDA expert here, that runs a lot of, Gus is their automated underwriter, they could probably tell us in practical terms what that is but they don’t actually publish one.
[00:22:17] Jeb Smith, Huntington Beach Realtor: We have that, but you said manual underwrite a minute ago. Why would someone manually underwrite a file when they can get an automated underwriting approval? Right. Seems like a lot more work to manually underwrite a file.
[00:22:29] Josh Lewis, California Mortgage Broker: So it’s a fallback. If you cannot get an automated approval, you might fall back to a manual underwrite. And we’re gonna start with Fannie Mae and Freddie Mac ratios for a manual underwrite. I will tell you it is not impossible, but it is very, very difficult to find any lender that is doing manual underwrites for Fannie Mae and Freddie Mac loans. It puts an additional level of risk on the lender. Most lenders are not comfortable with it.
We talk a lot about Dave Ramsey on show. A lot of the stuff he talks about and says is crazy. Some of it is very good and helpful. One of the things he says is, “it’s okay to not have a credit score. You’re better off with not using debt, not having anything, not having a credit score.”
Well, if you don’t have a credit score, you are not getting an automated approval. And you would have to, if you wanted a conventional loan, go to one of those very few lenders that will make a manual underwriting decision on a loan that doesn’t get an automated approval. He has a advertising relationship with a company that absolutely does do them.
So if you find yourself in that situation where you need a conventional loan and a manual underwrite, go check out Dave. He can absolutely point you in the right direction. But if you were looking at ’em, the guidelines, Fannie Mae will tell you, 36% is the maximum debt to income ratio on a manual underwrite if you can find the lender that will do them. 36 to 45% with higher credit scores. So they have a matrix. Depending on how high your credit score is, you may be able to go as high as 45%. Freddie Mac says a 25 to 28% housing ratio. 36% total debt to income ratio, you can go up to a [00:24:00] 45% total debt to income with compensating factors.
And people always ask, what are compensating factors? It may be something like, you’ve been renting a house for $4,000 and your new payment is gonna be $3,300. The fact that you’ve demonstrated an ability to pay all your bills and a higher payment, that’s a compensating factor. Let’s say you have a second job that you’ve had for 11 months. We can’t use that as qualifying income, but we can document it. We know you’re getting it. It’s a compensating factor of how you can handle a higher debt to income ratio.
Same thing with FHA. Their standard guidelines, the 31% housing to income ratio, 43% total debt to income ratio if you have no compensating factors. They’ll bump that to 33 over 45 with an energy efficient home, which most homes don’t fall under that other than very new homes. Most new homes do, older homes don’t.
If you have one compensating factor, you can go to a 37 over 47 and with two compensating factors, 40 over 50. So, that is what comes up much more often, both FHA and VA manual underwrites. And for some reason I screwed up and didn’t get the VA manual underwriting guidelines here.
But for VA, you’re also likely to be capped at 50% and it’s gonna fall back on that residual income ratio and maybe some additional compensating factors. We also, Jeb, on the automated underwriting, didn’t talk about jumbo. Some jumbo programs will follow Fannie Mae/ Freddie Mac, automated underwriting decisions, but most of them don’t have an automated underwriting engine, so they either have overlays or they fall back on manual guidelines.
Because each jumbo lender makes their own guidelines, if you’re looking for a jumbo loan, the most conservative is gonna be somewhere at like a 33% debt to income ratio. The most aggressive is gonna be 43% for 90% of lenders, there are those that will do a 45 or a 50. There’s gonna be limitations. The majority of jumbo lenders want to see you under 43%.
[00:25:52] Jeb Smith, Huntington Beach Realtor: So the moment everyone has been waiting for, and that is how much you can qualify for today, let’s use a rate of say, six and a half percent. Josh, we’re gonna assume what tax rates are at one and a quarter percent. This is gonna be a big variance. Okay? I want you to understand that depending on where you’re listening in the country, the rate isn’t going to be any different on the mortgage for the most part, right?
Because where Josh can tell us in a minute whether, what kind of credit scores we’re assuming and what have you. But tax rate can vary by state and it can vary a lot by state. Nationally, the average is about 1.1%. Here in California, most lenders are using around one and a quarter percent. But you can go to states like Texas, states like Florida, typically states that have no state income tax, typically have higher property taxes because they have to make up for some of that tax in another way.
So just understand when we say these calculations, in some areas of the country you have to take it with a grain of salt. If you’re here in California, the numbers are probably gonna be a little bit more accurate than anywhere else, just because [00:27:00] we’re using numbers that we would use locally.
But with that said, we’re using a tax rate of one and a quarter percent. We’re using insurance rates. So when you get, when you buy a home, you have to get insurance on that home and we’re using a 0.35% on that, and we’re not assuming any HOAs. Right? Is that fair to say, Josh?
[00:27:17] Josh Lewis, California Mortgage Broker: Yeah, no HOA. So, if you have an HOA, it’s going to cut back what you can qualify or it’s gonna require additional income. So your mileage will definitely vary on these depending on where you are. And it can vary not just from state to state, it can vary within California. We have some areas with almost 2% tax rates. We have some areas that are in fire hazard areas, and you’re gonna pay a lot more than 0.35% for your insurance.
So for these, I basically ran FHA 3.5% down. Conventional 5% down. VA zero down. So if you put more down, you can get away with less income. This is considering the best qualified borrower. Credit score above 740 and you’re getting an automated approval. So with this, started with the number of $300,000 right now with an interest rate, ballpark, six and a half percent.
A week or two ago they were below that. Today, they may be above that, but using a number of six and a half, you would need to buy a $300,000 house, about $5,500 a month for fha, and that would allow you to have $250 a month of debt. So if you have $600 a month of debt, you’re gonna need more income or you’re gonna qualify for less.
On a conventional loan, again, because we can have that double ratio you’re gonna need at least $5,000 a month, $60,000 a year of income if you have no debts. More if you have debt.
On the VA, this number’s gonna sound crazy and it could be very, very difficult, but in theory, 3,500 a month, if you meet that residual income guideline, exceeding it by 20%. I would count on something probably closer to the FHA number, about $5,000 a month but we have seen very high debt to income ratios for very well qualified veterans. So anywhere from $60 to $70,000 right now for household income to qualify for a $300,000 home with minimum down and not excessive debts.
[00:29:07] Jeb Smith, Huntington Beach Realtor: The question is, how much income do you need to buy a $500,000 home using these same calculations?
With FHA, you need around $8,800 per month. Again, we’re taking in about $400 a month in debt. So if you have $400 a month in debts, you still can qualify with about $8,800 per month in income. That comes out to a hundred, just over a hundred thousand dollars per year.
Conventional, you’re gonna need around $8,000 per month. That’s $60,000 a year, no debts. Actually, that’s not correct.
[00:29:39] Josh Lewis, California Mortgage Broker: It’s nine $96,000. I screwed you up on that, Jeb.
[00:29:44] Jeb Smith, Huntington Beach Realtor: Set me up. Um, VA you’re gonna need around $5,500 a month. Again, that’s a super aggressive number basing that on getting that super high debt to income ratio and having the ability to exceed that residual income [00:30:00] by 20% or more like we discussed earlier.
So Josh, why don’t we finalize it by talking about $750k and $1 million to give people an idea of where they stand?
[00:30:08] Josh Lewis, California Mortgage Broker: Absolutely. So at $750k, it’s gonna punch that payment up on an FHA to about $6,200 a month, and you’re gonna need at least $13,000 of income, probably a little bit more. That puts you to almost $160k annually.
On a conventional 5% down, you’re looking at a payment somewhere around $6,000 a month, $12,000, monthly income if we have no debts, $145,000 a year. Most people carry some level of debt, so you’re looking at a higher number.
And again, VA with the most aggressive qualifying, maybe you could get away with a little over 8,000 and $100k a year.
Now, when we pump that number up to a million, obviously we’re getting to real numbers here in terms of a pretty significant income to qualify for that with a minimum down. $8,200 monthly payment on an FHA. Using the, the lower tax and insurance rates we have here in California, you need about $17,500 in monthly income, $210,000 for the household.
Conventional, 5% down it’s about an $8,000 payment. $16,000 monthly income if we have no other debts and well qualified, so a little under $200,000.
And then VA, the absolute most aggressive, you’re gonna need $11- $12,000 of income, which puts us to a $130 to $140,000 annually to qualify for that.
So, Jeb, those numbers, I just kind of wanna go back on them. You’ve done multiple videos on your YouTube channel showing what it takes to qualify and the difference between where we were not just before home prices shot up in 2020 and 2021, but in the last year with home prices elevated, interest rates elevated. I talk to people often that come from the internet that are shocked, you know, and they’re not making 65% of the money that it takes to qualify for the homes that they wanna buy.
It’s been a shock because they know that, “well, what do you mean? My friend who makes a similar amount of money bought in 2020 with an FHA loan?” Well, rates were half of what they were and home prices were 40% lower. It makes a pretty significant difference. So you want to make sure you’re looking at numbers online.
Usually if you’re looking at like the Redfins and the Zillows and plug in their calculator, they’re using a higher interest rate, higher mortgage insurance. So it’s gonna give you a worse case scenario, but at least it gives you an idea of what a payment looks like. And using these debt to income ratios that we went over with you, you’re able to back into how much money you would need to buy the types of homes you are interested in.
[00:32:33] Jeb Smith, Huntington Beach Realtor: No, if there’s one thing you get from this show, other than understanding what it is and how it’s calculated, it’s t o make sure you’re working with a pro. We just went over a lot of different numbers, a lot of different calculations, a lot of things that if you read the guidelines wouldn’t necessarily be on the guideline sheet because some lenders do things a little bit differently.
There’s lenders out there that have overlays on programs. You’ve probably heard me talk about it on different [00:33:00] videos where even though conventional FHA USDA VA might allow it, that lender says, we’re not going that high for one reason or another. They make their own guidelines on top of those guidelines. Usually a little bit more strict to keep themselves from being quite as risky on some of these loans.
So, to sum it up, make sure you’re working with a pro. Make sure you’re working with somebody that has access to multiple lenders, so if you don’t qualify for say one lender, you have the ability to maybe take it somewhere else. It’s okay to check with your bank. It’s o kay to check with your credit union on these things, but also have a conversation with a broker in your market, just to compare it to at the end of the day. That way, you know you’re getting the best deal possible.
So again, hopefully that was an episode that made sense. Something that you guys wanted to know. Again, this show came up because someone asked for it. So we’re always saying, what do you guys want to hear about? This was three days ago. Somebody asked for this, now they have it.
So if there’s something you wanna listen to or wanna hear more about, please reach out to us. There’s an email in the description below. There’s also a link to a lender if you need one.
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