1. “Understanding Debt-To-Income (DTI)” “Understanding Debt-To-Income (DTI)” August 19, 2010 Patrick Brock Mortgage Loan Officer Bank of America Home Loans 626-253-3944 (cell) patrick.brock@bankofamerica.com

2. What Is Debt-To-Income? The debt-to-income ratio indicates how much of the buyer’s income goes toward debt payments. The debt-to-income ratio can be used to determine whether the buyer has too much debt to qualify for a loan.

3. DTI Guidelines for Qualification As a general guideline, the maximum total debt- to-income (DTI) ratio should not exceed 36 %. Certain loan programs may contain specific criteria that are more restrictive and/or different from these standard guidelines. An excessive DTI ratio generally indicates that the buyer has insufficient capacity to support total monthly obligations. The risk represented by the excessive DTI ratio can be offset by acceptable compensating factors.

4. Compensating Factors Compensating Factors Strong credit characteristics that can be used as a strength to offset risk A successful history (for at least 12 to 24 months) of paying previous housing expenses that were equal to or greater than the proposed monthly housing expense. A large down payment (over 20%) toward the purchase of the property. Purchase of a property that qualifies as an energy- efficient dwelling, due to lower utility costs. Credit ratios may be increased up to 2% over the maximum allowed. A demonstrated ability to devote a greater portion of income-to-basic needs like housing expense.

5. Compensating Factors Compensating Factors continued Lowering the monthly housing payment. A demonstrated ability to accumulate savings and to maintain a good credit history or a debt free position. A potential for increased earnings and advancement, because of education or job training, even though they have just entered the job market. A net worth substantial enough to evidence the ability to repay the mortgage. Reserves substantially higher than required by the program.

6. How To Calculate DTI Expenses (Debt) - The applicant's recurring charges or payments. Income - The applicant's verified gross monthly income from all verifiable sources that can reasonably be expected to continue for at least the next three years. Total Debt-To-Income ratio - Ratio determined by dividing the total of monthly housing expense and other monthly expenses by the gross monthly income. The results of the ratio computation are always rounded up and are expressed as percentages. EXAMPLE: Total Monthly Expense (Debt): $ 1,700 Divided by Monthly Income: $ 4,750 Equals:.3579 Multiply by 100 to convert to %: 36% (rounded up)

7. Two Sides To Debt-To-Income Ratios Simply: DEBT (expenses) vs. INCOME

8. What’s Included – Expenses (Debt) Expenses are usually expressed in terms of a specific time period (e.g., monthly, annually, etc.). Recurring expenses must be expressed in terms of their monthly cost: – Annual expenses are divided by 12 – Quarterly expenses by 3, etc. Expenses include: – Payments on installment loans – Revolving credit (Credit Cards) – Auto loans – Mortgages (including taxes and insurance) – Alimony, etc.

9. What’s Most Important To The Underwriter – EXPENSES (Debt) Expenses – The UW cares most about the items and expenses appearing on the buyer’s credit report at time of application. All expenses appearing on the credit report will be included in the DTI ratio unless earmarked to be paid-off/paid-down, excused, or otherwise explained and excluded. Rule of Thumb – If it appears on the credit report, it is an expense effecting the buyer’s DTI ratios.

10. What’s Included - Income Acceptable Income Sources: Alimony, Child Support or Separate Maintenance Automobile Allowance Business Expenses (Unreimbursed) Bonus Income Commission Income Disability/Worker’s Compensation Family-Owned Business Foreign Income Foster Care Income Interest and Dividend Income Manufacturing/Piece Work Military Income or Military Reserve Income Notes Receivable Overtime Part-Time Income Payroll Services/Leasing Employees Public Assistance Income Projected or Proposed Income Rental Income Retirement Income – Annuity, IRA/Keogh, Pension and Retirement Royalty Income Salaried Income Second Job Seasonal Unemployment with Associated Unemployment Compensation Section 8 Payment Vouchers Self-Employment Social Security – Retirement/Surviving Spouse or Child and Supplemental Security Income (SSI) Temporary employment Tip Income Trust income Unemployment Compensation VA Benefits Voluntary Separation Incentive (VSI)

11. What’s Most Important To The Underwriter - INCOME Income – The UW cares most about the verification of ALL income listed on the buyer’s application. Employment Income – Pay stubs for the last 30 days. Passive Income (Pension, Retirement, Disability, Social Security, etc.) – Most recent statement verifying receipt of the passive income for at least the next 3 years. Rule of Thumb – Any income stated and utilized to determine DTI ratios NEEDS to be verified at time of application. The UW will verify the income again prior to drawing closing documentation (this is done to be sure no significant changes to income have taken place during the escrow process).

12. How To Count COMMISSION Income When commission income is used as qualifying income, the applicant must have a two-year consecutive history of receiving commission income and the income must be likely to continue for the next three years.

13. How To Count OVERTIME Income When overtime is used as qualifying income, the applicant must have a two-year consecutive history of receiving overtime income and the income must be likely to continue for the next three years. The applicant’s overall income should be evaluated using the hourly rate, the number of hours worked, to develop an average of overtime earned to determine the amount that is most likely to continue for the next three years. The loan file must contain an analysis of the income used to qualify.

14. How To Count BONUS Income When bonus income is used as qualifying income, the applicant must have a two-year consecutive history of receiving bonus income and the income must be likely to continue for the next three years.

15. The Effect of Paying-Off Debt to Help Qualify Generally, the pay-off/pay-down of debt can substantially decrease the risk factor of a loan. Consideration must be given to the type of debt being paid-off, as well as the applicant’s spending habits, source of funds used to pay- off/pay-down the debt such as gift funds. Verification of sufficient funds to pay-off/pay- down any debt must be provided in the loan file.

16. When To Include Pay-Off/ Pay-Down in DTI Ratios Installment debt with 10 or fewer months remaining should not be included in the DTI ratio, unless the payment is substantial and the applicant has limited cash reserves. If a revolving account (credit cards, etc.) is to be paid-off or paid-down but not closed, the existing monthly payment on the current outstanding balance should be counted in the DTI ratio.

17. Acceptable DTI Ratios Vary From Product-to-Product Here are a few examples… Conforming Fixed Conforming Fixed Period ARMs FHA

18. Conf Fixed Rate Products Qualifying Debt-To-Income Ratios: 28/36% Loan-To-Value (LTV) > 80%: Maximum DTI is 41% regardless of Digital Underwriting (DU) decision. These ratios may be exceeded if there are compensating factors.

19. Conf Fixed Period ARM Products Qualifying Debt-To-Income Ratios 3/1 and 5/1 ARMs: – Loan-To-Value (LTV) < or = 80%: 28/36% – Loan-To-Value (LTV) > 80%: 28/36% – Max DTI is 41%, regardless of the DU decision. 7/1 and 10/1 ARMs: – LTV < or = 80%: 28/36% – LTV > 80%: Maximum DTI is 41%, regardless of the DU decision. Notes: These ratios may be exceeded if there are compensating factors. Maximum DTI on 3/1 and 5/1 ARMs is 40% on manually underwritten loans with compensating factors.

20. Federal Housing Administration (FHA) Products Qualifying Debt-To-Income ratios: 31/43 Ratios may exceed standard guidelines with strong compensating factors when the loan is manually underwritten Applicants with insufficient credit history are limited to a DTI ratio no greater than 31/43 and compensating factors do not apply. Ratios may exceed standard guidelines with a Digital Underwriting result = Accept/ Approve. Ratios may be exceeded to 33/45 for energy efficient transactions.

22. Thanks For The Opportunity! Please let me know how I can help.