https://www.youtube.com/watch?v=Cz-VSsIvQ84&list=WL&index=7
Talk about debt to income. I don't think people talk about debt to income enough, and you're like, why do I care? Well, because it's a great indicator, A if you're going to get approved for a mortgage and B if you're going to be able to afford it when you do. So today, I'm going to be talking to you about how a lender looks at your debt to income, and good news! Alyssa and Sandy have been very busy putting together a debt to income calculator that you guys can do either on the phone with them. Just get on the calendar; it's always free. I would recommend doing it with them on the phone just because there are so many variables, and we'll talk about that today. But if you're like, 'Nope, my situation's easy,' you know, email Sandy (I'll put her email in the description), and she can get a copy of it over to you, okay? But I'll have the calendar in there too, and that is my suggestion, okay?
So, debt to income, as a lender, I'm looking at two aspects of it. I'm looking at your front-end debt to income and your back-end. So, the front end is your projected housing payment versus your gross income (gross is before tax). Your back end is your projected mortgage payment as well as the minimum monthly payments on your credit report. So, your car loan, your credit cards, you know, student loans if you're in an income-based repayment program (we would be going off of that for some loans; other loans have different parameters). So, if you have student loans that are not reporting payments, I definitely think you need to talk to a lender when you're doing this because you're likely to calculate it incorrectly due to the many variances based on loan program. I know, okay?
So, you're going to... I would say, like, go to Credit Karma. They're not charging right now to look at your credit. Look at your credit, you know, look at your bills. Okay, do you have, like, a Macy's card? Maybe you owe $400, and the payment's $25. Great, you know, that is what we're looking at when we're calculating that back-end debt to income. Now, there's one exception to that, and that is with VA loans; we also include childcare expenses. That's the only loan that we do that on, and that's for daycare only. Okay?
So, front end is the housing payment versus your gross income; back end is housing payment plus the stuff on your credit report, maybe daycare if you're doing VA, and then versus your gross income. Now, people go, 'What is a good debt to income?' Jen, it depends on your personal situation, but there's definitely some debt to incomes where I'm like, 'Woo, we need to have a talk.' And if you do your debt to income calculation and it's 80% on the back and 30% on the front, you've got a lot of debt, you know? That's what's going on there because if your front end, the housing payment versus your gross, is 30%, that means that other 50% that's getting you to 80%, it's what's on your credit report that is not good, okay? That is signs that you need to start taking care of that, you know, doing a budget and whacking away at debt.
Now, something that's very important to note is that the way that lenders look at your income can be very different than the way you look at income. So, let's start with income and how a lender looks at it. So, if you're commission, I'm going to do a 2-year average. What that means is, let's say you made $100,000 in 2022 and $150,000 in 2023. Easy, I'm going to add it up, divide it by 24; that is your monthly income. Now, if your income was $100,000 in 2022 and $50,000 in 2023, different story. You need to talk to a lender whenever your income's declining significantly; it could make it so you're just not eligible based on that. Now, let's say it's $100,000 and it goes to $90,000. Okay, we're not going to add the two years and divide by 24; we're just going to do the $90,000 because it's declining. But a big decline, you need to talk to a lender because that can be a problem, okay?
Commission, kind of tricky, not too much if you have less than a 2-year commission history, you need to talk to a lender because for the majority of loan programs, we do require a 2-year commission history, okay?
But let's say you're like, 'Jen, I'm not even ready for a house.' Okay, guys, then use what you think you're making. Okay? And if you use what you think you're making and your debt to income is really high, once again, you've got to get rid of some debt or you need a more realistic housing payment. Okay? The easiest way to do a debt to income calculation is if you're salary, right? If you make, you know, $60,000 a year, great, divide it by 12. That's going to be the income the lender uses, that's going to be the income you use.
If you receive a bonus, we need a 2-year history; we're going to average it just like we did with the commission, okay?
Hourly workers, if you work 40 hours a week, easy.
If you get a ton of overtime, once again, you're going to want to do this with a lender. And I look, if you are doing overtime like Sandy and Alyssa can't even help you with that. I need an application; I need to do a written verification of employment; I need a lot of details because you have to calculate that overtime over a two-year period. And if it's declining, once again, you have a problem. So, you have to look at the whole subset, okay, to get accurate numbers.
And I know I'm being annoying because I'm being so detailed, but it's because I see people do this stuff wrong all the time.
And sometimes they disqualify themselves when they shouldn't, and other times they're so convinced that their debt to income is something different than what they're being told, and it's because of the way a lender looks at income. And the way we look at it is not our personal feelings; it's based on the guidelines for generally Fannie, Freddie, or Ginny. So, um, really the easiest one to do salary.
Self-employed, you're like, 'Oh, gross income, awesome.' Not for self-employed. Self-employed, you definitely want to do an application with a lender and really look at it because we're going to be going off of your net, as well as we have a few things we can add back in, okay?
So, if you're unsure how your income is going to be calculated, once again, get on the calendar, talk to the girls; they'll walk you through it. That's the first puzzle piece you need to know.
Now the next is the mortgage payment. And I would advise for the first time you're doing this, think about what you're comfortable paying. So, if you're comfortable paying $2,500, let's just write down $2,500 for the projected mortgage payment because when we get into the weeds of figuring out what your exact payment's going to be, there are terrible calculators. Look, we have a calculator that we keep on working on and working on and working on at our company. I still don't think it's accurate enough that I would tell you guys to use that instead of talking to a lender when it gets to the nitty-gritty. Because the nitty-gritty is going to depend on the loan amount, the county you're looking in, what is the average property taxes, how do they calculate them, homeowners insurance, what's realistic for the area, what's not. There's a lot of variables that can really sway your numbers.
So I would say for when you're first doing this, do what you're comfortable with, and let's look at your debt to income from there because a lot of times people will say to me, 'Hey, I can totally afford $4,000,' and I'm like, 'Okay,' but I do their debt-to-income and it's really high, and I'm like, actually, it makes more sense if you're at like 28, you know, and we walk through that. So, it can be a good way to gauge: are you assuming you can do too much? Or, you know, sometimes all people say, 'Look, I can't afford a nickel over $2,500,' and I look at their debt-to-income, and we have a full conversation, and I'm like, your debt to income is 25%. You know you can, but let's do a budget about what you're comfortable with, okay?
And sometimes people just assume they have a really high debt-to-income when they don't. I'm one of those people. It doesn't matter how much money I will ever make; I will always feel like insecure about it, always, you know? Some of us are just programmed like that, you know? If you are, drop it in the comments, so I'm not alone. But sometimes you're just always going to feel like it's going to be high, even if it's nowhere near that. So, this is a really good exercise to do that and a reality check, okay?
So, you've figured out your income for the mortgage payment you're going to do. What you feel comfortable with? Okay, great. So, the easy calculation is basically just your mortgage payment divided by your income. Sometimes people go, 'Okay, for front-end ratio, Jen, what should it be?
There's no exact answer for what it should be; it really depends on your overall spending. You know, because if I said, 'Oh, you know, it could be 30-40%, but if you have a ton of debt, that's not going to work.' Or if I say, 'Oh, you know, it can't go over 30%, but you have no debt, that's not accurate either.' So, there is no one-size-fits-all number. Really important, you know that because I know that Dave Ramsey pitches a one-size-fits-all, but I'm telling you there's not, okay?
So, let's go to the second portion of the equation, which we talked about, which is the backend ratio. And this would be easier if you had the calc. I might have a link; I've got to figure this out, okay? We may upload it to my website, and I'll have a link so you can do it. I'll put in the description what we decide to do, but I want you talking to the girls because I know it will be more accurate. We, in. Okay, backend ratio. So, the backend, if I was doing this at home, what I would do is I would look at my credit report, you know, Credit Karma. Some of the credit card companies show you, and I would write down (and I think this is a good thing to do anyway) because I think that when you write down what your debt is, it's more real. I know that sounds strange, but it's true; try it. So, write down, you know, Chase, $2,000. What's the minimum payment? Because that's what we're going to be calculating. So, let's say the minimum payment's $100, okay? And then you're like, 'Car loan, $10,000, and the payment's $100, and that's all you have,' okay?
So, if you're doing your calculation, you're going to be doing the car loan plus that minimum payment. So, we're at $500, plus that mortgage payment, divided by your gross income, and that will give you your backend debt to income. Okay, that was very simple because I just did two things, right? That's not normal for America; we're going to have a lot more stuff on there.
So, you want to make sure that you're writing down all the minimum payments. Now look, if it's a credit card you pay off every month, you don't have to put the minimum payment; just make sure that when you're getting qualified, you tell the lender, 'Hey, I pay off my XYZ every single month.' American Express is a card I think about with that because sometimes people put everything on it. And let's say they have a $22,000 balance on an American Express; it's going to show that you have a $2,000 payment. Do not calculate that into your debt to income because you pay it off every month.
Okay, student loans, student loans. Hopefully, you have a payment; it's really easy if you do; use the payment. If it's an income-based repayment plan, we're going to go off of that for some loan programs, but some loan programs still have a calculation if you're deferred, and it's over 12 months and we can prove it. Most loan programs will exclude it if you're deferred, but it's only for a couple months. You really need to talk to a lender because we need to talk about likely what type of loan you're going to do so we can help calculate that student loan payment for you accurately because it does vary. Okay, that's one of the trickiest things is the student loan payments if they're not already in repayment.
Now, one more thing to know, if you're doing a VA loan, in addition to what's on your credit, we're also going to be including daycare. So, if you have daycare expenses, you definitely want to put that in for any loan, okay? If you guys pay alimony or child support, that also goes into your debt-to-income, even if you only have a couple of months left; we have to hit you with it until it's 100% gone, okay?
In terms of debt-to-income, one of the things that I think is really interesting, because after we fully underwrite people, I like to have a conversation with them, 20, 30 minutes, sometimes 40, sometimes an hour, because I like to see, you know, hey, this—we talk about debt-to-income on a lot of the calls, and I'll be like, 'You know, sometimes I'll hear, 'I just can't afford this payment,'' and I'm like, 'Your debt-to-income's 30%, what am I missing?' Okay? And look, if it's a conventional, FHA, USDA, jumbo mortgage, it's probably daycare because we don't take that into consideration. The other thing that a lender is not going to take into consideration is tithing; it's not something that we look at. You know, we also don't look at if you're paying for your child's College, you know, unless it's on the credit report. So, there's a lot of large expenses that you can have on a day-to-day basis that we don't ever see.
So, that's why it's really dangerous, you know. I would say to ever assume that if a lender says that you qualify, you do. There's so much we don't look at. And with the calculator that Sandy and Alyssa built, um, it does have some of these additional items in there, so that you guys, even though, look, the lender is going to have a lower debt-to-income than you, but if you're tithing or you have significant daycare, you're going to want to know what your debt-to-income is with those expenses because they will affect how happy you are in the house. When people's debt-to-income is pushing over 55%, it's really hard to get by. And if I have you, let's say we're doing FHA or VA, and I have you at 55%, and you have additional big expenses every month that we don't even know about, you're setting yourself up for a world of hurt. With conventional, often we can go up to 50%, same thing, you know. So, you really want to be cognizant of what is my debt-to-income, you know. And if you talk to your lender and you're like, 'Hey, can we talk about my debt-to-income?' and they say, 'Why?' you're with the wrong lender, okay?
I bring it up on a lot of calls, um, not every call, and I, you know, I need to remind myself to do that sometimes. When it's really low, I don't go into it. If the debt-to-income's higher, I'm always going to go into it, and the reason is that, you know, I was house poor once upon a time, and I know what that's like, and I've made it my mission that my clients never go into that with their eyes closed. If they're going to go into that situation, I'm going to make it real clear, 'Hey, this is what I'm seeing, this is what I'd suggest.' And sometimes I might see a higher debt-to-income, and my suggestion is this: do a budget. Right? And honestly, seriously, guys, no matter where your debt-to-income is, a budget is a really good thing. So, if you guys are like, 'Oh God, a budget too, I don't know what to do,' Alyssa, once again, Alyssa and Sandy, both of those gals are budget queens, and I've been talking to them a lot recently about, 'Hey, how can we help people more?' 'Cause look, we're definitely, you know, you need a loan, okay? I can close your loan, no problem, I'll get you a great rate, we'll have a great time, it'll be wonderful. But sometimes people need a little bit more help, or they may be ready to get the house, but they just need a little bit more planning so that financially it's comfortable.
So, what we're going to see in the new year, and you guys can ask for this whenever you want with Sandy and Alyssa, just put in the notes on the calendar, 'I would love help creating a budget,' they're happy to help. 'I would love help with my debt-to-income,' they're happy to do it, okay? So, definitely take advantage of all of these tools, um, and the resources that I've put together for you guys, and basically having two amazing, you know, licensed loan officer women who really care about Financial Health and who are happy to spend their time helping you with the stuff that none of us were taught in school. So, as always, thanks for watching, and I will see you soon.