A description of how the loan process works

1. Alpine Mortgage Planning
Freddie Parish

2. Of the three major lending fundamentals:
ASSETS
INCOME
CREDIT
Income is the most challenging to correctly identify.

3. Whereas credit and assets are straightforward
documents to be reported, income must be
CALCULATED and PROVEN, according to guidelines
that are constantly evolving and changing.
Correctly calculating income is the one thing
that most distinguishes a good mortgage loan
officer from the rest!

4. When applying for a mortgage loan, a borrower
must prove their ongoing ability to repay that
loan. Lenders use 8 specific criteria to determine
whether or not the applicant meets the Qualified
Mortgage (QM) standard. If any of these 8 criteria
are not met, the borrower does not meet the QM
requirement, and is therefore ineligible.

5. Of the 8 QM criteria, today we will be talking
about DEBT-TO-INCOME RATIOS. The objective of
this class will be to help you to understand what
debt ratios mean, how we calculate them, and
lastly to give you a few tools that you can use in
the field to help you be more effective agents.

6. To meet the Qualified Mortgage (QM) standard, a
borrower must show AT LEAST a 2-year work
history, in order to consider their income as likely
to continue. The “likely to continue” standard
should support the realistic expectation that the
borrower’s income will continue for AT LEAST 3
YEARS BEYOND THE CLOSING DATE.

7. The standard documents we use to validate a
borrower’s income history include:
• Federal Tax Returns
• Individual, Corporate, Etc.
• Income Tax Forms
• W-2, 1099, K-1, Etc.
• Pay Stubs
• New Hire Letter
• Employment Contract
• Pension/Disability Award Letter(s)

8. Defined as: Borrower receives pre-determined
income for each pay period, regardless of hours
worked.
EXAMPLE: $60,000 annual salary
($60,000 / 12 months = $5,000 per month)
Borrower may qualify with salary after as little as
one pay period, as long as we can establish a 2-
year work history

9. Defined as: Borrower is paid an hourly rate for
work performed.
EXAMPLE: $20.00 hourly wage
($20.00 x 40 hrs per week = $800 per week x
52 weeks per year = $41,600 / 12 months =
$3,466.67 per month)
Borrower must prove 2 years of consecutive
employment, supported by 3rd party employer
verification to prove hours worked, and a strong
likelihood of future employment.

10. Defined as: Borrower earns OT pay when working more
than 40 hours per pay period or for working on a non-
standard work schedule. Calculating OT requires 24
month history, and is averaged*
EXAMPLE: 2011 OT Total: $5,875 - 2012 OT Total: $8,450
($5,875 + $8,450 = $14,325 / 24 months = $596.88 per month)
Overtime is considered separately from wages/hourly
income. A borrower MUST prove 2 year history of OT to
use OT pay. OT must be proven via 3rd party employer
verification.

11. Defined as: Borrowers who receive bonuses may use this
toward qualifying if they have at least a 2-year bonus
history.
EXAMPLE: 2011 Bonus: $3,000 – 2012 Bonus: $4500
($3,000 + $4,500 = $7,500 / 24 months = $312.50 per month)
Bonus income must be proven by 3rd party employer
verification.

12. Defined as: Borrowers who receive permanent disability
or Social Security may use this as income as soon as they
become eligible recipients.
EXAMPLE: Borrower receives $1500 per month for Social Security
($1,500 per month, or $1,875 per month if non-taxable)
Pension or disability income must be proven to continue
for at least 36 months beyond the closing date for
consideration.

13. The most commonly misunderstood income category. For
qualifying purposes, we use the Adjusted Gross Income (Net
Income after Expenses) for determining eligibility
EXAMPLE (Basic Schedule C):
2012 Gross $150,000 – 2012 Adjusted Gross $39,750
2011 Gross $112,000 – 2011 Adjusted Gross $21,000
($39,750 + $21,000 = $60,750 / 24 months = $2,531.25 per
month)
Self-employment income may be easy or complicated, depending on
the borrower. For qualifying purposes, a borrower typically must be
self-employed (in the same position) for at least 24 months before
their income is considered eligible. Some exceptions apply.

14. Child Support/Spousal Support
Must continue for at least 36 mo. from close date
Investment/Dividend Income
Must prove 24 mo. history. If using dividends for
income, borrower may not use the same account as
an asset.
Unemployment Income
Useable for “seasonal employees”

15. Regular: $1,275.76
Overtime: $170.16
Effic Pay: $2,556.42

16. We have the income calculated
How does that translate to qualifying for a mortgage?
Once a borrower’s income is calculated, it is then
compared against program specific, allowable debt-
to-income ratios (DTI). Debt ratios include “front-
end” (housing only) debt ratio, and “back-end” (total
debt, including all monthly obligations) debt ratios.
The borrower is then qualified for a targeted monthly
payment amount, which is translates to a purchase
price, depending on the property type (i.e, SFR vs.
Condo).

17. A borrower is qualified as eligible for a mortgage loan
based on the total monthly mortgage payment, including:
Principal & Interest
Property Tax
Hazard Insurance (If Applicable)
Mortgage Insurance (If Applicable)
HOA Dues (If Applicable)
**See your Alpine Representative to discuss allowable debt ratios for the specific loan
program for which your borrower is interested in applying**

18. This monthly payment is considered against the
borrower’s gross monthly income, and must be less than
program guidelines in order for a borrower to be eligible.
This “housing only” ratio is also called the “FRONT-END
RATIO”

19. Borrower is a salary employee, making $5,000 per month.
They’re hoping to purchase a $300,000 home, using FHA
financing. The FHA mortgage (at 4.00%), breaks down to:
Principal & Interest: $1,406.30
Property Taxes: $276.43
Hazard Insurance: $60.00
Mortgage Insurance: $325.69
Total Monthly Payment: $2,068.42
$2,068.42 / $5,000 = 41.4% FRONT END RATIO

20. A borrower’s monthly debts are also included to
determine their eligibility. This includes INSTALLMENT
DEBTS (car loans, student loans, mortgage loans),
REVOLVING DEBTS (credit card minimum payments), and
OTHER monthly obligations (child support, alimony, etc.).
These payments, combined with the prospective house
payment, must be LESS THAN program specific guidelines
in order for a borrower to be eligible. This “total debt
ratio” is also called the “BACK END RATIO”.

21. Borrower is a salary employee, making $5,000 per month.
She is hoping to purchase a $300,000 home, using FHA
financing. The FHA mortgage (at 4.00%), breaks down to:
Borrower has the following monthly obligations
Car Payment: $440.00
Student Loan Payments: $260.00
Credit Card Minimum Payments: $250.00
Total Housing Payment: $2,068.42
Total Debt Obligation: $950.00
Prospective Housing Payment: $2,068.42 per MONTH
Total Monthly Debt: $3,018.42

22. Borrower’s Debt Ratios: 41.4%/60.4%
$3,018.42 / $5,000 = 60.4% Back End Ratio

23. FHA Maximum Debt Ratios:*
FICO Score 640+ 46.99% / 56.99%
FICO Score 620-639 46.00% / 49.99%
FICO Score 580-619 31.00% / 43.00%**
Conventional Maximum Debt Ratios:*
ALL FICO Scores 44.99% / 44.99%
*Subject to DU Approval
**Manual Underwriting Only

24. When talking to a prospect at an appointment, or
at an open house, what are some things you can
remember to help you to be the expert with your
prospect?
Payment Conversion Rate:
As a general rule of thumb, a borrower’s monthly
payment will increase by about $7.00 per month,
for every $1,000 that they borrow. Therefore, by
that estimate, a $300,000 purchase (FHA) should
cost a borrower approximately $2,100 per month.

25. Using our previous example of $300,000 purchase
price, and a total monthly housing payment of:
$2,068.42
If we increase the purchase price to $301,000,
the total monthly payment will increase to
$2,072.11
A difference of $6.69/month

26. QUESTION 1: Using our conversion rate short cut,
what is the approximate difference in monthly
payment if we go from a $300,000 house to a
$320,000 house?
Answer:
Note: The conversion rate can also be used in
reverse
$140 per month

27. QUESTION 2: Using the conversion rate short cut, if your
borrower is qualified to $300,000, and decides they want
to offer on a condominium with a $280 HOA, how much is
their maximum purchase reduced?
Answer: $40,000, or a new
maximum purchase
price of $260,000

28. If you’re talking with a borrower, and you’d like to
know for what they might qualify, use 45% as a
safe ratio for qualifying income. For example, a
new buyer prospect comes to meet you at your
office, and they want to buy a $300,000 property.
Using the conversion rate short cut, you know the
monthly payment on that (FHA) is going to be in
the neighborhood of $2,100.

29. Assuming the borrower can show their income, if you
have to guess, use 45% of their income as a generic
guideline. For example, a borrower made $36,000 in W-2
income last year, and wants to buy a $300,000 house.
$36,000 X 45% = $16,200 / 12 months = $1,350.00
max housing payment
Since we know the $300,000 is going to cost approximately $2,100 per month, the
borrower is most likely going to need a co-borrower if they want to buy that
$300,000.

30. QUESTION 3: If they have no co-borrower, what
is the approximate price for which this borrower
might qualify?
Answer: $192,850 = $1,350 / $7 per month