Debt to income ratio analysis (home affordability)

Debt-to-income ratios are more complex than most Real Estate Investors realize. The ratios themselves are simple 28% front end (housing payment) and 43% back end (the new housing payment plus all debts on the credit report). Understanding the intricacies of debt alone, as viewed by an underwriter, can be very complex. Did you know automobile payments made by a self-employed individual through his company (by check) for more than a year would allow an underwriter to ignore that payment when considering his debt load? Calculating income can also be a challenge. All income on a paystub is considered, taxes paid are part of income, cafeteria plans have nothing to do with food and are part of income, there is a minimum time on a job based upon profession which is required to use as income, social security can be grossed up, unemployment income cannot be used, etc…

The debt-to-income ratio analysis by takes current underwriting guidelines into consideration and combines it with theprojected housing payment then calculates if for a future date such as 18 months from now. It allows for fluctuation based upon interest rates historical data and within a reasonable tolerance, projects likelihood of eligibility. The debt-to-income ratio analysis is a very important part of your closing documents. It should be signed by the tenant-buyer with a statement he/she/they will not assume any new debts. This helps to ensure the tenant-buyer can afford the payments both now and in the future when they apply for their mortgage while keeping you in compliance!

An addendum to the lease-option contract (see below for sample) can be drafted to specify tenant-buyer engage, complete a credit enhancement program with as well as follow their instructions including but not limited to building new credit. This addendum is also a protection device implying if the tenant-buyer strays from the program then… write in your terms providing they are reasonable

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