Topic: Mortgage Underwriting Processes

Ling and Archer $(2021)$ briefly discuss the lender$$s mortgage loan decisions in terms of underwriting, and one term they explain is debt$-$to$-$income $($DTI$).$ The DTI is commonly used in consumer lending to determine, truly, if the applicant has the ability to cash flow when adding in a new monthly debt payment.

The DTI sums the total amount of monthly debt payments, and divides the sum of those monthly payments by gross monthly income.

For example, if I have a $$1,000$ monthly mortgage payment, a $$300$ student loan payment, a $$300$ car payment, and $$200$ in credit card payments, the sum of the monthly debt payments is $$1,800.$ Notice that this does not include all monthly payments, such as a cell phone, groceries, cable bill, etc., only required debt payments.

In this instance, your monthly gross income $($before taxes are taken out$)$ is $$3,500,$ which equates to $$42,000$ annually.

To calculate DTI, you take the sum of monthly debt payments divided by the monthly gross income.

$$1,800/$ $$3,500=\mathrm{.}5142,$ or $51\mathrm{.}42\%$ debt to income. This tells the underwriters that from your income, $51\mathrm{.}42\%$ automatically goes towards your required monthly debts.

Most banks have a DTI threshold between $40\%-45\%.$ So$,$ in this situation, if you were looking to take out additional debt $($maybe a pipe broke and you need to take out a short$-$term loan to fix it$,$ or your washer and dryer need replaced, or your car suddenly needed major auto repairs... life happens, right?!$),$ you would automatically be declined a loan because of being over the maximum DTI threshold of $40-45\%.$

Assignment Instructions and Materials:

Part $1$ Assignment Instructions:

Considering all of the information given above, do some research regarding the future career you are pursuing and the area you are wanting to live in$.$ Explain the following:

The area or location you hope to live in$,$ and the cost of a $2-,3-$ or $4-$bedroom home you would like to buy.

This will require going to a realtor website and finding a home you$$re interested in$.$ Take a screenshot or snippet of the home information from the realtor website and be sure to cite your source.

Use a mortgage calculator $($search the web$)$ to calculate what the minimum payment would be$.$

This may also require additional research to determine the average annual property taxes in the city$/$location you are wanting to live in$.$

You will also need to determine the average annual cost of home$-$owners insurance. This may require additional research.

Use a $7\%$ and $30-$year, $7\%$ and $15-$year, $4\%$ and $30-$year, and $4\%$ and $15$ year mortgage loan rate and term, as outlined below. Provide screen shots of these.

Find the average wage for the job you hope to pursue in that city$/$location$/$county$.$

Remember that if you are just graduating college, you will more than likely be coming in on the lower$-$end of the salary or pay scale. Make sure to cite your source.

Consider any debt you may have at that time, hypothetically. It may be student loan debt, it may be debt for a vehicle or other loan payment, it may be a monthly credit card payment $($even if you pay your credit cards off in full each month, there would be a required minimum payment in the event you were not able to pay it off$).$ Be realistic.

$1)$ Compute your DTI before the calculated mortgage payment with monthly rent of $$750/$month$.$ Be sure to show how you got this figure.

$2)$ Compute your DTI using the $30-$year mortgage payment and $7\%$ interest rate. Be sure to show how you got this figure.

$3)$ Compute your DTI using the $30-$year mortgage payment and a $4\%$ interest rate. Be sure to show how you got this figure.

$4)$ Compute your DTI using the $15-$year mortgage payment and $7\%$ interest rate.. Be sure to show how you got this figure.

$5)$ Compute your DTI using the $15-$year mortgage payment and a $4\%$ interest rate. Be sure to show how you got this figure.

Reflecting on this information and reviewing the loan payments$/$DTI information, how realistic were your expectations before completing this assignment? Why were they realistic, or why not?

For your reference, I have attached a shortened example from $2021.$

Reminder: If sources are consulted in your work, full citation should be made in APA format $($bibliographic citation including publication, title, author, etc.$).$ If you are unfamiliar with APA format, use the OWL Purdue website Links to an external site. for guidance.

Part $2$ Assignment Instructions:

Research the home mortgage loan process, and explain the steps to getting a home loan. What factors should consumers be thinking about as they consider purchasing a home?