I hear it every other phone call. "My attorney says you can work miracles, so here goes."
Do you realize how scary and humbling that is. Talk about pressure. Ha.
Here are 3 Math Tricks I use to make sure divorcing home owners/buyers get mortgages.
Spousal Support. Make it stretch out for 3 years. Anything less is not qualifying income. This involves multiplication and division.
Let's say the contemplated agreement is that husband will pay wife $5,000/month for two years. “That’s enough for any bank to feel good about giving her a loan,” someone might say. But, the fact is, $0 of that is qualifying income and lenders (other than the mafia) will not lend on that income. It must continue for 3 years. So, multiply $5,000 x 24 months = $120,000; NOW, divide that by 36 months and you get $3,333/month. The only question is to the recipient – can you live with that…can you get $3,333/month for 3 years rather than $5,000/month for 2 years.
If so, you have helped payee and payer. The payee is able to use all $3,333 as qualifying income in a mortgage; and, the payer will qualify for his/her loan more easily because instead of all $5,000 counting against their debt ratio, now only $3,333 will count against it.
Do not do this at home. Let me do it from my home. There are some nuances like exactly when the 3 years begins, and more. This is STILL custom designed.
Structuring Support (Child and Spousal works this way). In order to use support payments as qualifying income, two major features must be in place: history and continuance.
History. Documentation that payments have been received for *6 months.
Here’s what looks like magic: START NOW / START EARLY. Yes, even before it is ordered.
This “tricks” the time-line in reverse.
Of all the four major underwriting engines (computer programs and guideline manuals) – Fannie, Freddie, FHA/HUD and VA, only FreddieMac requires the support to have been ordered. The other three require DOCUMENTATION.
But, remember to do this under my team’s precise guidance.
Continuance. Verify continuance for 3 years. (See above #1).
But, this is not as you may support. It is not 3 years from loan closing or final divorce.
It is 3 years from LOAN APPLICATION.
This means your client should apply as soon as possible. There are rarely any true impediments to doing this.
The math of it is on the calendar – what month did the client apply and what month will support end?
DTI – mortgage lingo for Debt To Income ratio.
DTI is the measure of a borrower’s monthly minimum payments required by the creditors (or contracts like a mortgage installment) divided by the borrower’s gross qualifying income.
There are maximums allowed. Those maximums can vary but are generally specified in underwriting guidelines or in the computer programs of “automated findings.” It generally ranges from 43 to 55.
And, until those automated findings are “run,” the loan officer cannot say for sure.
This is different for loans that are not subject to underwriting findings – the investor/lender publishes the maximum DT ratios and that’s that.
This math works when a home-owner is refinancing (to relieve the other spouse of the mortgage liability and, perhaps, to include a buyout to that other spouse) and there is some equity in the house.
This math is addition and division (i.e. percentages)
Example: If there is a credit card debt of $10,000 it may have a minimum monthly payment of $400 on it. For someone making $4,000/month, this will have the effect of adding 10 points to their debt ratio. If that $10,000 is “rolled in” through a buyout – see my Owelty seminar for the example – the additional loan amount adds <$50> per month to the mortgage while eliminating the $400/month from the DTI ratio. This has a net effect of lowering their DTI ratio 8.75 points (400 = 10 points; 50 = 1.25 points – the difference is 8.75 DTI points). This is how we lend MORE money and LOWER the borrower’s qualifying ratios.
This has the double benefit of qualifying the borrower for the mortgage AND giving a newly divorced homeowner a better monthly budget, one that will help them adjust to their new life.
*6 months is the current requirement (for the most part) in mortgage underwriting. It used to be 3, technically FHA requires 12 but the “automated findings” for nearly all mortgages have been stating 6 months for over a decade now.
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