According to the new CFPB Mortgage Rules, borrowers applying for a mortgage must have a debt-to-income ratio of 43 percent or lower.
While this change doesn’t differ from previous lending tactics, the number comes from calculating a borrower’s total monthly income and his or her total monthly liabilities. Then, with the liabilities divided into the total monthly income, the lender comes up with a percentage that partially shows a borrower’s ability to pay back a loan.
What counts as a liability? Once a borrower gives the lender a figure for a proposed monthly mortgage payment, his or her credit card debts and other outstanding loans, like student loans, second mortgages, home equity line of credit, and cosigned loans get calculated together. The newer standards, as well, may include child support payments.
However, in certain instances, some of the above may be exempt: if the borrower has less than 10 months to pay on a loan; if he or she plans to pay off an account before or at closing; and if a cosigned loan is at least 12 months old and the borrower can prove another party has consistently been making payments on it.
For the Self-Employed
Being self-employed poses multiple challenges in qualifying for a mortgage, especially for the debt-to-income ratio. For borrowers, even if applying with a co-applicant, the following documents are required:
• Proof of income through tax returns.
• A complete IRS Form 4506-T, which should be sent from the IRS rather than the borrower.
• Year-to-date profit and loss statements from an accountant.
• Proof the business exists, from two years of tax returns, statement from an accountant, a business license, a website and client statements, or 1099 income statements.
Self-employed borrowers must realize that net, rather than gross, income is the figure reported. Should a self-employed borrower have a high level of yearly expenses that ultimately lower the amount of taxes paid at the end of the year, his or her total income becomes smaller, which in turn influences if he or she can qualify for a mortgage.
As well, even if a self-employed borrower qualifies and has steady income over multiple years, high interest rates should be expected.