Mortgage Calculations and Underwriting — Unit E Notes

Loan-to-Value (LTV)

  • LTV is based on the lesser of the appraised value or the purchase price: starting point for calculation.
  • Example 1 (no second mortgage):
    • Loan amount = $
      80{,}000$; Value = $
      100{,}000$.
    • LTV = \frac{80{,}000}{100{,}000} = 0.80 = 80\%$.
  • Example 2 (with second mortgage):
    • First mortgage = $80{,}000$, second mortgage = $10{,}000$; combined = $90{,}000$.
    • Value = $100{,}000$.
    • LTV = \frac{90{,}000}{100{,}000} = 0.90 = 90\%$.
  • Note: LTV influences eligibility, pricing, and loan programs.

Housing Expense Ratio and PITIA

  • Housing expense ratio concept:
    • PITIA (Principal + Interest + Taxes + Insurance + HOA dues) divided by gross monthly income.
    • Example: If PITIA = $1{,}600$ and gross monthly income = $5{,}000$, housing expense ratio = 16005000=0.32=32%\frac{1600}{5000} = 0.32 = 32\%.
  • Back-end ratio concept (DTI):
    • PITIA plus all minimum debt payments from the credit report divided by gross monthly income.
    • Example note: Use PITIA + minimum debt payments when calculating back-end DTI.

Periodic Interest (Daily, Monthly, Annual)

  • Periodic interest calculation basics:
    • Annual interest = Loan amount × Annual interest rate.
    • Daily interest = \frac{Loan amount × Annual rate}{365}.
    • Monthly interest (PITI context) = \frac{Loan amount × Annual rate}{12}.
  • Formulas (in general):
    • Annual Interest=Loan Amount×r\text{Annual Interest} = \text{Loan Amount} \times r where $r$ is the annual rate.
    • Daily: Daily Interest=Loan Amount×r365\text{Daily Interest} = \frac{\text{Loan Amount} \times r}{365}
    • Monthly: Monthly Interest=Loan Amount×r12\text{Monthly Interest} = \frac{\text{Loan Amount} \times r}{12}
  • ARM loans mentioned but not detailed in this unit.

Debt-to-Income (DTI) Guidelines and Underwriting

  • DTI is a critical, heavily weighted metric for both automated and manual underwriting.
  • Guidelines vary by loan type and program:
    • FHA: front-end (housing) 31%, back-end (total) 43%.
    • VA: back-end DTI 41%; no housing ratio due to residual income considerations.
    • USDA: front-end 29%, back-end 41%.
    • Conforming (Fannie Mae / Freddie Mac):
    • Manual underwriting: housing + total DTI cannot exceed 36% (with certain compensating factors).
    • DU (Desktop Underwriter) guidance: max DTI can be higher—often 45%, and in some cases up to 49% depending on factors.
  • The chart/context shows how different transactions, credit scores, and down payments affect eligibility.
  • Concepts to remember:
    • Purchase type (purchase vs. refinance vs. cash-out refinance).
    • Property type (owner-occupied vs. investment; 1–4 units).
    • Eligibility thresholds depend on score, reserve requirements, and underwriting method.

Underwriting Guidelines by Loan Type (Overview)

  • Automated Underwriting System (AUS) context:
    • Fannie Mae DU determines maximum LTV/CLTV/HLTV and total loan limits based on transaction type and unit count (1–4 units).
  • FHA, VA, USDA, and Conforming have distinct pathways and compensating-factor requirements.

FHA-Specific DTI, Credit Scores, and Compensating Factors

  • Credit score bands and corresponding DTI allowances:
    • 500–579: 31% housing / 43% back-end with manual underwriting.
    • ≥580: 31% housing / 43% back-end with no compensating factors; up to 37% housing / 47% back-end with one compensating factor.
  • Compensating factors that can improve eligibility with higher DTI (examples):
    • Significant cash reserves.
    • Additional household income not included in the application.
    • Residual income calculations (VA context) or other ongoing income assurances.
    • Low discretionary debt (e.g., 40/40 scenario with no discretionary debt).
    • Two compensating factors can allow 40/50 (e.g., reserves + residual income).
  • Note: Compensating-factor allowances demonstrate risk mitigation in the lender’s view.

VA Residual Income and Regional Variations

  • VA residual income is a key factor for loan eligibility and varies by family size and region (Northeast, Midwest, South, West).
  • The chart/table shows required residual income by family size and location to determine loan viability.

Case Study 1: Abelonia (Case Study — Maximum Housing Cost for Qualification)

  • Profile:
    • Occupation: Sonographer, standard 40-hour week.
    • Hourly wage: $36.75.
    • Overtime: averages 8 hours/week (over last two years and year-to-date 10 hours/week).
    • Student loan payment: $278/month; balance $28{,}000.
    • Auto loan: new car; monthly payment $534; balance $32{,}000.
    • Current rent: $1{,}700/month.
    • Savings: $28{,}000; 401(k): $65{,}000.
    • Down payment intent: 10%.
    • Employer mortgage assistance plan offering 10% second mortgage at 3% interest, 15-year amortization.
    • Credit score: 790 (excellent).
  • Income calculations:
    • Base wages: 36.75×40=1,470.0036.75 \times 40 = 1{,}470.00
    • Overtime: 55.13×8=441.0455.13 \times 8 = 441.04
    • Total weekly income: 1,911.041{,}911.04
    • Annualized income: 1,911.04×52=99,307.04$1{,}911.04 \times 52 = 99{,}307.04\$
    • Monthly gross income: 99,307.04/12=8,281.1799{,}307.04 / 12 = 8{,}281.17
  • DTI calculation under automated underwriter (DU):
    • Max back-end DTI (45%): 0.45×8,281.17=3,726.530.45 \times 8{,}281.17 = 3{,}726.53
    • Monthly debt (existing): 812.00812.00
    • Maximum allowable housing cost: 3,726.53−812.00=2,914.533{,}726.53 - 812.00 = 2{,}914.53
  • How the calculation works:
    • Determine max housing payment by applying max back-end DTI to gross income, then subtract recurring debts to find housing affordability.
  • The calculation emphasizes how gross income, debt, and DTI interrelate for qualification.

Case Study 2: Abdul (Case Study — Commissioned Income and Max Financing)

  • Profile:
    • Base salary: 85,00085{,}000 per year.
    • Commission: 125 basis points (0.0125) on gross sales and service agreements; last year commissions: 79,00079{,}000.
    • Experience: 7 years in the industry; 3 years with current employer; 15 months in current commission role.
    • Expenses reimbursed; business income stability considerations.
    • Student loans: two payments: 879$/mo balance 88{,}000;;334$/mo balance 38,00038{,}000.
    • Credit card debt: just over 5,0005{,}000; paid off every month (business travel).
    • Current home equity: expects at least 178,000178{,}000 proceeds on sale; savings ≈ 77,00077{,}000; 401(k) ≈ 97,00097{,}000.
    • Credit score: 798 (excellent).
  • Income calculations and decision rationale:
    • Total annual income: base 85,00085{,}000 + commissions 79,00079{,}000 = 164,000164{,}000.
    • Monthly gross income: 164,000/12=13,667.00164{,}000 / 12 = 13{,}667.00.
    • Monthly debt payments: 1,213.001{,}213.00.
    • Max DTI (45%): 0.45×13,667.00=6,150.150.45 \times 13{,}667.00 = 6{,}150.15.
    • Housing payment capacity after debt: 6,150.15−1,213.00=4,937.156{,}150.15 - 1{,}213.00 = 4{,}937.15
  • Outcome: Maximum housing payment available to Abdul under DU is 4,937.154{,}937.15 per month (subject to other underwriting factors and reserves).

Case Study 3: Samantha & Richard (Aggregate Case — Decline Based on Ratios and Reserves)

  • Profile:
    • Samantha: Auto dealership salesperson.
    • Samantha income: commission last year 31,00031{,}000; base salary 1,400/month(i.e.,1{,}400/ month (i.e.,16{,}800/yr).
    • Richard: Teacher; wages 42{,}000/yr; part-time summer carpentry income as independent contractor; Schedule C net income pretax last year 5,5005{,}500; no business income the year prior.
    • Debts: Two auto loans with payments 389/mo389/ mo and 427/mo427/ mo; balances > 20,00020,000 each. Credit card debt ≈ 19,00019,000. Richard's student loans: 415/mo415/ mo and 198/mo198/ mo.
    • Current home equity: little; no savings; expects net ≈ 5,0005,000 from sale of current condo for down payment on new home.
    • Purchase target: $400{,}000$; current loan balance on property: $272{,}000$.
    • Credit scores: Samantha 615; Richard 579.
  • Calculation and outcome described in the transcript:
    • Combined annual income (as presented): base 42{,}000 + base Samantha 16{,}800 = 58{,}800 per year; monthly ≈ 4,900.004{,}900.00.
    • FHA max housing ratio as presented: 43% total? The calculation uses 43% as the max DTI for FHA.
    • Maximum FHA housing payment prototype: 4,900×0.43=2,107.004{,}900 \times 0.43 = 2{,}107.00.
    • Less existing debts: 2,107.00−2,379.00ext(debt)=extnegative2{,}107.00 - 2{,}379.00 ext{ (debt)} = ext{negative} (i.e., debt burden exceeds capacity).
  • Result: The loan would be declined due to excessive ratios, excessive consumer debt, lack of reserves, proposed housing cost increase, discretionary spend concerns, and noted underwriting criteria.
  • Lesson: Even with some income potential, high debt and low reserves can lead to denial under qualifying guidelines.

Per Diem Interest

  • Definition: Per diem interest is the daily interest owed from the time the loan is funded until the end of the month.
  • Calculation approach:
    • Annual interest amount: Loan Amount×Interest Rate\text{Loan Amount} \times \text{Interest Rate}
    • Daily interest: Loan Amount×Interest Rate365\frac{\text{Loan Amount} \times \text{Interest Rate}}{365}
    • This concept also underpins interest-only payments if applicable.

Prepaid and Accrued Costs at Closing

  • Closing costs can include prepaid items that are shared between buyer and seller (e.g., property taxes, HOA dues).
  • Process to determine who pays whom:
    • Identify the tax year and calculate how much of the tax is owed or prepaid.
    • Determine whether the amount is credit to the buyer or seller, or debit to either party.
  • Example: Accrued taxes of $1{,}200 for tax year 2020.
    • Closing occurs on Aug 1.
    • Daily interest on a tax proration example: 3.29 per day3.29\,\text{per day} (illustrative).
    • Seller portion of days owed: 213 days; Buyer portion: 152 days.
    • Seller owes the buyer: 3.29×213=700.773.29 \times 213 = 700.77.
  • Key takeaway: Accrued/prepaid taxes affect cash to close and tax proration between buyer and seller.

Summary: Quick Reference Formulas and Concepts

  • LTV (single loan):
    • LTV=Loan Amountmin⁡(Purchase Price,Appraised Value)\text{LTV} = \frac{\text{Loan Amount}}{\min(\text{Purchase Price}, \text{Appraised Value})}
  • LTV with multiple liens (e.g., first + second):
    • LTV=First+Secondmin⁡(Purchase Price,Appraised Value)\text{LTV} = \frac{\text{First} + \text{Second}}{\min(\text{Purchase Price}, \text{Appraised Value})}
  • Housing expense ratio (PITIA):
    • Housing Expense Ratio=PITIAGross Monthly Income\text{Housing Expense Ratio} = \frac{\text{PITIA}}{\text{Gross Monthly Income}}
  • Back-end DTI (PITIA + minimum debt payments):
    • Back-end DTI=PITIA+Total Minimum Debt PaymentsGross Monthly Income\text{Back-end DTI} = \frac{\text{PITIA} + \text{Total Minimum Debt Payments}}{\text{Gross Monthly Income}}
  • Periodic interest:
    • Daily: Daily Interest=Loan Amount×r365\text{Daily Interest} = \frac{\text{Loan Amount} \times r}{365}
    • Monthly: Monthly Interest=Loan Amount×r12\text{Monthly Interest} = \frac{\text{Loan Amount} \times r}{12}
  • Maximum DTI thresholds (typical ranges by program):
    • FHA: front-end 31%, back-end 43%
    • VA: back-end 41% (no housing ratio)
    • USDA: front-end 29%, back-end 41%
    • Conforming – manual underwriting: up to 36% (subject to compensating factors); DU can allow higher (up to ~45–49% in some cases)
  • FHA compensating factors (example): 0–1 factor allows 31/43 or 37/47; 2 factors can allow 40/50
  • VA residual income: region- and family-size dependent table
  • Per diem and closing-proration calculations follow pro-rata rules based on days in period
  • Real-world implication: Lenders assess risk via LTV, DTI, credit, reserves, and transaction characteristics; different programs have different floor/ceiling rules and compensating factors for risk mitigation.