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Mortgage Debt-to-Income Ratio (What Is a GOOD DTI? How to calculate DTI?) - YouTube
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hi I'm Mark Anderson mortgage banker
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with paramount bank based in st. Louis
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Missouri I am licensed to lend in all 50
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states and I would love the opportunity
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to earn your business so today is the
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first episode of what I'm calling the 10
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minute mortgage class I used to shoot
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videos called the 5 minute mortgage
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class but I could never really seem to
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get it all in in 5 minutes we're gonna
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go to 10 let's see how that goes the
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subject of today's first video of ten
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minute mortgage class is debt to income
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ratio so basically there are three key
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variables that we use in the mortgage
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industry to determine your ability to be
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approved for a loan
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there's credit there's assets and the
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subject of this video debt to income so
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what we're going to cover in this video
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is number one how to do the DTI
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calculation number two what are the
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maximum thresholds for approval on your
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DTI and then three we're gonna go
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through some problem-solving there are
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times where maybe your debt to income
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ratio is just barely above that that
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maximum limit and we're gonna walk
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through some ways that I take a look at
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that for problem-solving number one how
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do we do the calculation it's pretty
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simple we start with your monthly debts
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we add in your new mortgage payment so
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if you're looking to buy a home one of
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the first things I always tell people to
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do is figure out based on your budget
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what you want to spend total per month
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on that mortgage so monthly debts plus
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the total new mortgage payment and we're
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gonna divide that into your gross
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before-tax
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monthly income the result is your DTI
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number so for example let's say your
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monthly debts are 650 dollars let's say
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your target mortgage payment is 2000 and
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let's say you've got $8,000 a month
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before tax income 650 plus 2000 divided
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into 8 thousand equals 0.33 which we
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express as a percentage your DTI in this
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case would be 33 percent now we need to
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talk a little bit about monthly debts
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because there are some things that are
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included in this number for our purposes
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and there are some things that are not
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included in this what is included is
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your credit card minimum payments car
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loans any installment loans which would
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include student loan
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any retained mortgages so basically if
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there's property that you own right now
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that you have a mortgage on it you're
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going to want to include that mortgage
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payment in this monthly debt calculation
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and then also any alimony or child
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support the monthly debt number does not
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include your current rent the utilities
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that you pay your phone bill your let's
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say your car insurance your life
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insurance doesn't include that and it
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also doesn't include your general
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lifestyle expenses now we do need to
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drill down a little bit on one of these
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details which is student loans so
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student loans if you are in a deferred
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status or a forbearance status when I
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pull their credit report a lot of the
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time it's going to show me a zero
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payment now unfortunately the mortgage
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agencies kind of got wise to the fact
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that loans were getting through with
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zero for the payments on the student
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loans and they came up with a guideline
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anytime I see a zero monthly payment on
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a student loan where there is a balance
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the general requirement is you're going
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to want to use one percent of the
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balance to count toward that monthly
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debt that monthly debt calculation now
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there are some programs that allow a
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slightly different calculation there are
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also some ways where if we obtain
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certain documentation that shows us what
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the payments are going to be there are
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certain cases where we can use a lower
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number than that for qualifying purposes
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but the safest way to do it is to take
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one percent of the balance and use that
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in that monthly debt calculation
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approval limits this is going to be a
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big theme of all these videos you know I
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started wanting to do these educational
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videos because most of the information
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that I find on any of these subjects on
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the internet is wrong now
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there are a bunch of personal finance
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sites that I like and I'm not going to
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name them but I've got a few examples of
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just totally wrong information about the
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subject of our video I'm not going to
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name them in most cases lenders want
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total debts to account for 36% of your
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monthly income or less non-conventional
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mortgages like FHA loans may accept a
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higher DTI ratio but conventional
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mortgages may not be as flexible not
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correct a DTI of 43% is typically the
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highest ratio a borrower can have and
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still get qualified for a mortgage but
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lenders generally
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seek ratios of no more than 36% finally
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the specific numbers vary from lender to
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lender but many lenders use 36% as a
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maximum debt to income ratio that said
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many other lenders will let you go up to
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55% not true so the first thing that
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they get wrong is what the DTI limits
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are actually set by you saw in each
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three of those examples they would have
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some language like well lender to lender
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you may run into different numbers
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lenders don't set debt to income ratios
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you can call 10 lenders in town and they
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don't have different debt to income
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ratio limits generally speaking where
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these DTI limits come from is actually
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from the mortgage agencies so these are
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agencies like Fannie Mae Freddie Mac FHA
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VA they are the ones that actually set
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the thresholds it's not really an
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individual lender to lender thing the
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other thing that they get wrong and I
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see this all over the place a lot of the
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guidance you'll find online assumes that
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mortgages are still the guidelines are
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still you know written in a book and
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everything is manually underwritten and
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this advice is basically you know 30
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plus years old the 36 percent number
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there's a reason you saw that in each
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one of them and it's because that was
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the rule like a really really long time
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ago back before we had automated
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underwriting now automated underwriting
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is what we use right now and not only is
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it what we use right now but it's what
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we've used since 1994 and so the reason
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you see that computer there is that is
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the computer image that came up when I
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googled computer from 1994 that's to
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make a point
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automated underwriting has been with us
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for a very long time what it is
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basically is the agencies that set these
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limits they build an algorithm that
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algorithm evaluates the overall strength
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of your loan application and they
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compared it to what you're trying to do
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they look at your credit they look at
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the DTI and they're going to set a limit
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based on your individual characteristics
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and the algorithm that's built into the
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automated underwriting system so again
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the aus findings are going to tell you
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what your maximum approval limits are
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the problem is there is not really a
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consumer facing option to run an
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automated underwriting evaluation so
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what I've come up with are some general
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limits based on my 15 years of
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experience now these limits change from
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time to time the algorithms are played
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around with all the time we'll get an
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email that says ok desktop underwriter
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by Fannie Mae is coming out with a new
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new algorithm basically and here are the
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changes that we expect to see so your
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mileage may vary with the numbers I'm
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about to give you but what you'll see is
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that these numbers are very very
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different than the 36% number that you
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see over and over and over again and I'm
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separating them out into the different
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agencies that are involved so
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unconventional loans in general where
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you start to run into trouble is at 45%
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if your DTI is over 45% you stand a
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strong chance of being denied but in
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some cases I have seen approvals go all
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the way up to 50% on government loans
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it's going to vary on the specific type
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of government program so for instance
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FHA fairly routinely I will see
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debt-to-income ratios of 50% approved
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and in some cases all the way up to 57%
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VA has a very wide range from 41% to 60%
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and USDA this is a rural housing program
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narrower range 41 to 46 percent now
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jumbo lenders they are actually still a
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little bit old-school in the way that
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they work they do have us use an
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automated underwriting system to
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evaluate the file but in general they're
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going to set their debt-to-income ratios
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based on an actual published guideline
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that doesn't really vary from
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application to application they're also
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much more conservative in general if
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you're looking for a jumbo loan you're
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going to have a limited set of options
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if your DTI exceeds 41% there are some
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options at least that I'm aware of that
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will go up to 43% of course some
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exceptions to that you may find some
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lenders out there going higher
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but generally speaking 41 to 43 percent
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is going to be your limit okay you've
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talked to a lender and they've said you
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have a DTI problem it's I can't approve
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your loan because your DTI is too high I
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wanted to create a little flow chart
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that walks you through how I would
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recommend
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evaluating this problem if you run into
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it the first thing I think my industry
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does not do a good job of this
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you know we see ourselves as being there
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to tell you what your mortgage options
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are but I think a lot of us are very
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uncomfortable ever trying to tell
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anybody what to do and I'm certainly not
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going to tell you what to do but I will
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say if your first impression when you
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run into a debt to income ratio problem
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is to say well darn it I want to make
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this work no matter what I really do
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think that you need to take it as a
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signal to stop carefully consider your
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budget the mortgage payment that you
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take on I want my clients to not only be
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able to afford it but to be able to
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comfortably afford it having a budget
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and having a really good sense of the
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number that is not going to make you
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uncomfortable knowing that owning a home
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presents you know honestly some
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additional expenses I've never been one
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of those guys that says buy a house
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because it's cheaper than rent because
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in my personal experience it's not there
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are all kinds of advantages and in some
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cases there's some some financial
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advantages with owning a home but in
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general it's it's especially if it's
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your first time buying a home you may be
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surprised by the amount of expenses it
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can pop up you're fully responsible for
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the property so there there are bills
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pretty much around every corner that you
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could be facing so I really do think
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it's important if you run into a DTI
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problem first step stop
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consider your budget and maybe adjust
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that that target payment for your
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mortgage lower the next option you've
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got a lender telling you that he cannot
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approve you because of your DTI don't
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take any single loan officer's word for
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it not everybody is on their best day
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they may look at your file and say uh
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the DTI is a little bit close to the
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line I just don't want to hassle with it
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no I can't do your loan get a second
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opinion
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next up like a lot of problems in life
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you can throw money at it now this
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presumes of course that you have money
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to throw at the problem but one of the
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main things that we get around DTI limit
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problems is we have people pay off debt
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so this works out particularly well if
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you've got a balance that's maybe a
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little bit on the low side and you've
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got a payment that is proportionately on
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the high side you know
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got that balance you knock out that
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payment and so therefore that payment is
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no longer in your overall debt to income
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ratio calculation next up this may sound
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a little hokey but I do recommend if you
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run into a DTI problem you're thinking
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about buying a home I've had many
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clients over the years that took my
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advice on this and got a good outcome
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your mileage may vary but ask your boss
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for a raise
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make sure that uh that your company is
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aware that you're looking to buy a home
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and in you know see if there's an option
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there because if you increase your
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income then that makes your
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debt-to-income ratio better so it's at
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least worth a shot if you're trying to
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go through some problems with your DTI
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and then finally the kind of option of
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last resort for most people because most
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people do not want a cosigner as you can
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add a cosigner now the way a cosigner
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basically works is by adding them to the
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application we had their income into the
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mix but keep in mind if we're adding
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their income into the mix we've also got
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to add their debts so that that DTI
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calculation works out the same way but
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now instead of just you it's you and the
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cosigner together so it's their income
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your income your debt their debt plus
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the mortgage payment then you run the
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calculation the same way that is a good
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primer on DTI I hope you found the
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information useful please do like the
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video and subscribe to the channel I'm
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going to be doing a lot more of these
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educational videos in the future and it
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would really be helpful to to see my
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subscribers come up and for people to
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like the video so that I know that it's
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useful and you're getting something out
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of it please do share this video if you
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know somebody that's maybe a first-time
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homebuyer
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looking to get their feet wet in some of
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the early exploratory stages of the
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process please send them send them the
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video you can always call or text me at
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the number below I would love to hear
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from you thank you very much
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