Real Estate and You w/ Brad Weisman

Debt to Income Ratios, Co-Signers and other Mortgage Stuff - JP's Mortgage News

June 19, 2021 Brad Weisman, Realtor
Real Estate and You w/ Brad Weisman
Debt to Income Ratios, Co-Signers and other Mortgage Stuff - JP's Mortgage News
Show Notes Transcript

Justin Perella is back in the studio to talk about all things you want to know about qualifying for a mortgage.. credit scores... and so much more!!

  • What is a Debt to Income Ratio? 
  • What do you need to know about Co-Signing on a Mortgage? 
  • Do they use Gross Monthly Income or NET? 

These questions will be answered and so much more on this latest episode w/ Justin Perella from Annie Mac Mortgage.

Contact Brad Weisman  of Keller Williams Platinum Realty w/ any Real Estate Questions at [email protected] or visit his website at www.bradweisman.com


Keller Williams Platinum Realty
Brad Weisman has been a Realtor since 1992 and proudly sponsors this podcast!

AnnieMac Home Mortgage - Justin Perella
Justin is a local mortgage representative that excels in getting to settlement on time!

Speaker 1:

Hello, this is Brad Wiseman, and you're listening to real estate in you. I have a repeat guest bow . I don't know if I want to call him that because you know, it sounds kind of weird calling you a repeat guest , but it's just umbrella from any Mac mortgage he's going to be here the third Thursday of every month at round round one. O'clock cause we're not the most prompt people in the world, but , uh, yeah, he's back in the studio here. We're going to talk about mortgages of course. And , uh, Justin, how you doing,

Speaker 2:

Man? Good, good. Thanks for having me. Did

Speaker 3:

You ever feel like there's a take two on something?

Speaker 2:

Yes. I just experienced that. Not in long and just like

Speaker 1:

Deja VU a little bit.

Speaker 3:

No is if you're listening to the podcast, this is the second time we're doing the intro for this. So it's kind of interesting. Um , but we wanted to get into mortgages right away. There's there's so much about mortgages and I think every time we do the show, we try to pick up something different. Something that maybe the public will enjoy , uh, or nine judges . That education is what this is about. So you were telling me you had actually done some preparing for this, which is awesome. I mean , you were talking about income and there's, I guess the way we look at income as, as a non-mortgage person and the way you look at income, maybe are two different things. So tell me, let's talk about approving clients based on their income. What's the income part of a mortgage approval?

Speaker 2:

That's a great question, Brad, I'm glad you asked. I've been seeing it recently that , um, there's two types of clients, clients that are surprised at what they can afford and the

Speaker 3:

Price in , in that they can afford more than what they thought, right? Yeah .

Speaker 2:

Yeah. And that's typically you're seasoned buyers. Second time buyer. Um, first time buyers are a little different they're most of the time surprised they can't buy more. Um, but you got to understand that there's there's ratios that we all have to work, work within and we can get into the, this is called your debt ratio, debt to income ratio DTI .

Speaker 3:

Okay. Well, that's the word that people use and a lot of time to think , uh, your buyers will kind of fog over when, when you say something like that. So yeah . So the debt to income ratio is what does that mean? Explain what does it mean?

Speaker 2:

Right. So the good news in the mortgage world is we use gross. Yeah . Gross income, gross income. So a lot of people that are surprised that they're , they're getting as much approval as they are the ones that are looking at their pay stub and what they actually mean. So we tell them they make 5,000 a month. They're like, well, I see about three of that. Yeah. So, but what we do is we take the upfront gross and we calculate it based on whichever program they're going to go into and we can get into that. But once we have all of their income, so it's my job to get everything up front . So it's not a quick , all the income has to come in everything. Right . And, but that's our job to find that, okay, so, you know, I, I'm not an accountant, I'm not a CPA, but at the same time we have underwriters and we have scenario groups that we can go to on trickier income and trickier income would be like we talked about , uh , last month was rental property income, small businesses right now are getting, I don't want to say hammered, but you know, you, if you have a small business, whether you're a, you know, cut hair and you have your own business or really you better have a profit and loss ready to , to come up with. Cause they want to see due to COVID. They want to see current income and where you're at.

Speaker 3:

You're self-employed are we looking at two years, one year? Like how much?

Speaker 2:

Correct. Everything's based on two years to two years .

Speaker 3:

So I just started, I just started a new business , uh , land LLC, and it's doing well and everything's good. And my first years under my belt, I really need to wait to the second years under my belt

Speaker 2:

Only income. Yes. But if that is going to be ancillary income, like you've set that up. You have a sales job and you're making a commission with that and you do it for two or three years. And then all of a sudden you decide, you want to sell Tupperware, you know? And then you're going to create an LLC. Yes. For us to use that income, you would have to be doing that consistently for two years now on the flip side, how can that hurt you? Well, we have to show it. So if it's on your tax return, even that one year and you're showing them big loss, that's

Speaker 3:

Got it. Got it. Because, yeah, because when you're talking to the business, you're going to be taken out the expenses of what that, so it could actually be a negative. Correct. Which isn't extra . So what I'm learning is, is you're using gross, not net. So DOE so when somebody, when they tell you what their income is, a lot of times people might even tell you their net. Cause they're sitting there going well, I , my take home is probably 25,000. Well that means your gross is probably 40, you know, with , with taxes.

Speaker 2:

And that's why it's so important. Like when we ask clients for documents, it's not just not to be nosy or to fill a bucket. I mean, it is in the underwriter's eyes, but that's after we've calculated all the numbers, but W2 for anybody, that's a W2 employee is it's pretty, it's pretty straightforward . Right. That's what they make, you know ,

Speaker 3:

It's on there. There's no hiding anything. There's no. Yeah. And they're not deleting, they're not taking expenses out or anything like that. Yeah. So that's, that makes sense. That makes sense. So, okay. So we learn a little bit about that. The ratio thing has to do with also your expenses, right? The debt to income. Cause we're talking debt and we're talking income. So, so car payments and things comes off of career income, right?

Speaker 2:

So the way , um, the way we look at it is the gross income minus your debts and then whatever the percentages . So if it's 50%, then you take that number and divide it by that. And so let's just use 120,000. You make a year is 10,000, obviously a month gross. You take that number and your car payments 500 year. Um, uh, let's say you're you have a personal loan for 500. So that's a thousand. So now you $9,000 , uh , let's say you have another two 15 credit cards and then student loans . So all that is getting deducted and then base divided by or multiplied by the percentage we can approve you for is what your , your max payment can be.

Speaker 3:

Got it. Got it. Yeah. And that's, that's important stuff. So, you know, and this is why it's so important for people to get pre-approved. Um , when they're looking at a home, because there's a lot of things that go into it and you'll be set. I think a lot of times people are L many times people are surprised by what they are actually qualified to purchase. Uh , it doesn't mean you have to use all that. I mean, I tell people that all the time, you , you still want to be able to go out and eat at McDonald's sometimes, you know,

Speaker 2:

We try to put it in perspective , uh, of, you know, what do you feel comfortable with? Like to that's the first question. If I have a client that's going to be approved, let's just say for a $500,000 mortgage, but you know, they want to move in to be a little bit more reasonable. I'll let them know where I think their sweet spot is, but ultimately the client's got to make the payment not .

Speaker 3:

Absolutely. Yeah. You gotta be, you gotta be comfortable and you want, like I said, you wanna be able to do other things too, you know? So you had , uh , some of the other things that you had written down was , um, about co-signers this, this is, you know, we've been, we've had dealt with this before the whole co-signer thing. What does a co-signer mean? And I think also the other side to co-signers know exactly what they're getting into when they co-sign,

Speaker 2:

They should, they should. Yeah. It's, it's tough because if you're in a position where you need to ask somebody for help to , to piggyback on their income, there's, there's two ways it can go , uh, they can have good stray that you can have good income and good credit. Or in some cases we have clients that have good income, but bad credit or vice versa, right. Credit notes . So it's not as easy as it sounds just to pick a co-signer out, out of the blue, you gotta , you know, you've got, it's a huge commitment for the co-signer. It is. We typically see parents are the majority of the co-signers because they understand and trust, you know , but, but they're obligated, it's their loans.

Speaker 3:

Right. So, and that's just correct me if I'm wrong. What I, what I gathered from a co what you are as a co-signer. Cause I've seen this in situations where the person that co-signed is now looking to purchase a home and they go to purchase a home and they , and you say to them , uh, you know, you have a mortgage already on your name. And they're like, no, that's my daughter's . I ju I just co-signed. And I'm like, exactly, you don't know it, but you own a house already, just so you know. So no, and I think it's really, really important that whoever's, co-signing knows that this goes again, this is a , this is a debt against you. Um, it's a great thing to do if you can do it. And if the parents have the ability, that's wonderful. But I think it's a good on both sides that they have to understand. Now you have a , um, two people looking to purchase, whether they're husband and wife or not, doesn't matter one has, oh , credit that's marginal. The other one has fantastic credit. How does their interest rate get decided? Is it go buy the lowest one or go by the

Speaker 2:

Average right . Question, lowest one. But do we need the other one? That's what we asked . He's the owner . Yeah. And we need them, so

Speaker 3:

You, then you need them. So yeah. So you need the higher earner because of the income. And , um, but, but the credit's going to be, it's going to be the interest rates can be based on or the program. Cause at that point it could be FHA .

Speaker 2:

Right , correct. Right . So that's , that brings up a couple of great points. So yes, we do use the it's a big misconception. Well, they have higher credit , so we should average it together. Yeah , I wish. Uh , but it's not. And just to , um, to go into that a little further on the co on the co-signer that the one thing that I try to do and just to go back real quick is I try to make it as temporary as possible. So for example, if I'm putting a co-signer on for , it could be because they they've only been in their , their job for a year and a half and , and their wife's been in for two years, but you know, the other party, the husband and wife are going to be the husband's going to make more income and a half a year. Well, let's look the refi them off. Let's continue in the home and refinance you off. So that's one of the things I try to set expectations on this isn't for life that you're signing this co-signer, you're not a co-signer for life. So yeah .

Speaker 3:

And we did that recently on a deal. I know we did. Yeah. I remember it was a couple that we had to bring a parent in and they helped them out, which was great, but they're going to be hopefully refining soon , uh , to get that person off. And then the bring the way

Speaker 2:

It could be credit, maybe their credit. Um, think about it this way, their credit might've been below a threshold that we, we couldn't approve them for a certain better program. Um, so we added a mom too , to be able to remove one of the income people that have lower credit, but they're working on their credit and their credit goes up. Or if you add them to the mortgage and they pay on time, their credit's going to go up. So it works a couple of different it's going to help you. And yeah, if you can, co-sign it really,

Speaker 3:

If you can get that. Yeah. If you can, let's move on to the next one. So, and we could have actually talked about this in this conversation, but the , the ratios are different depending on whether it's FHR or conventional. And so, and this is what meal sellers asked me when we get these offers that come in multiple offers. You know, what's the big difference between, you know, FHA and conventional as a seller. What's the big difference. And I always say, one of the things is the ratios. They , they allow more debt. The debt to income ratio is higher with FHA than it is.

Speaker 2:

We can use more of your income right on FHA. And that's why first-time home buyers. It's a good program for them. And FHA is not a swear word. It's, it's, it's a great program. Uh , but we talked about FHA versus conventional. Um, for some reason, sellers are well not for some reason .

Speaker 3:

So when in a competitive market, extremely competitive, I shouldn't just say competitive, extremely competitive at market charts off the charts, competitive. Um, you know, cause right now FHA, I mean it's as great of a program as it is. And it's people the past, most of our sales, Reverend Jay , for the longest time, it was a lot of times a better rate. You could include more of your income. You could, it was more forgiving on credit scores. You know, all those things now, you know, things have changed and that's only because it doesn't mean you're a bad buyer. Nope. It's just because it's so competitive. And what happens is, you know, when , when you have, when you have a choice between conventional and FHA, when all things are equal, you know, price is the same, no inspections.

Speaker 2:

What if it's not equal? Like, so what's the , what's the, if I've got an FHA and I'm five grand over ask and conventional, are they taking the conventional, even though it's five grand less or are they taking the money?

Speaker 3:

If it's over full price, I'm taking the conventional, oh , you know why? Because you got to worry about the appraisal. There's no money. Cause you're looking at three and a half percent down. So there's, you know, if the conveyor , especially if the conventional is 10% or 15% or 20% down now, you know that there's a spread there that if it doesn't appraise, we have, we have some, hopefully have some money we can come up with. So FEG is not a bad thing. It's , it's a good loan. It's a great loan, gives a lot of people opportunity in the past and still to this day. It's just because the market is so competitive, it's getting picked apart. Yeah .

Speaker 2:

And for the buyer, for the buyer, the only difference that they see above that is the mortgage insurance, which on FHA, if you didn't know, it does not go away. So mortgage insurance is something you carry on your property. So you have 20% equity at 20% equity on a conventional. Once you have that a hundred thousand dollar home, you have mortgages 80,000 or lower that mortgage insurance goes away on that feature. You have to refi out of it. Which again, let's say you have a co-signer, let's say you're out. And now with $500 appraisal, you can hopefully get your, I mean, look at homes.

Speaker 3:

I could probably do it within a year, year and a half, you know, get some of that equity out of there quickly, you know, and just get to the 20% mark really fast actually. So , um, before we wrap this up , um, one of the other questions , uh, what you said, what , what do you recommend for clients that have a higher debt to income ratio? Yeah .

Speaker 2:

What do they do? I tend to get this a lot , uh, because I, I grew up in this. I grew up in the financial business, but helping people with these things before I got into mortgages. So one of my, I dunno , one of my strongest suits is making sure that I can work with the client to get them into the best program as quickly as possible. So in this case, FHA to conventional, I want to try to get your conventional if we can't make it work. But one of the ways we can make it work is to look over your credit report with you, identify which of the higher payments, not necessarily the higher balances, but the payments.

Speaker 3:

I tell people that all the time, it doesn't matter if you have a million dollars, if it's only 10 bucks a month, that's all it matters.

Speaker 2:

Correct? Correct. So by structuring it that way, and in some cases I've , they want to put 10% down. Maybe it makes sense to put five down and pay that car off with the other five grand. That's a good idea that,

Speaker 3:

So, and that's another thing. That's why it's good to come into somebody like you, who's sitting here looking at the big picture, you get all the information and it's like anything, let's bring it all in. Let's put it on the table and let's look and see what makes the most sense.

Speaker 2:

It's not just me either. I just want people to know, like I have a team that helps checks and balances. So that's important to know too, that not to me, that I only Trish Trish. And what's the other girl [inaudible] I have literal owners . Yep .

Speaker 3:

They do a really good job. So is there anything else you want to say before we wrap up this edition of JPS?

Speaker 2:

I don't think, I think we're good. I just , uh, I appreciate you having me on

Speaker 3:

Oh yeah, no problem, man. I love it too. It's good stuff. And you know, there's always something to talk about when it comes to mortgages. Always something to what's that oh yeah, that's true too. Just write them in and put them on the Facebook page for real estate in you. And then that way we get a chance to look at these questions. Um, oh, we just got something from Jordan crisis said two of my favorite people. Well, isn't that nice? So kind, so kind. All right. So there you have it as Justin. Perella from Annie Mac mortgage and he's going to be back on the third Thursday of every month at one o'clock. All right . We'll talk to you later.