Mortgage for self employed and DTI question

[Anonymous]

Hi Guys, 

I'm hoping I can peck more experienced brains here. When we bought our first home it was a walk in the park. We've since sold that house after 10.5 years and moved. We've been renting now for 2 years and are in the process of wanting to go purchase again. Since the move I have become self employed with my prior employer so that I can work from home. Same salary...different location and Tax Forms. We waited the 2 years because of the self employed sitatuation.

We just applied for a prequalification and we were turned down due to a 53.82% DTI and an unpaid collection from about 4 years ago. I can pay the collection and get rid of it if that's the difference between getting approved or not. The bigger question I have is the DTI. We have 2 car payments. My total credit card debt between 6 cards is about $1500 but most of that will be paid down in the next 2 months (Christmas and 2 December Birthdays...yuck). My husbands credit card debt totals about $5k or so. We have some student loans but totals less than $300/month. My question is with being self employed and the DTI I'm not sure where they are getting such a high DTI from. The total minimum payments on the cards across the board is around $250 but it's only been the past 2 months that any of my credit cards even had a balance. From Jan-March 2017 I was a regular employee. Then from April-current I am self employed. They asked for W2's for 2016-2017 for me, 2017 taxes and 30 days of pay stubs for my husband.

Would eliminating my credit card debt and paying the collection be the best course of action? Or is it because I'm self employeed and need to wait 1 more year for 2017-2018 income? They said nothing about credit scores so I assume those were not the deciding factor. The loan officer just said High DTI and unpaid collection. He wasn't very helpful in givng us an action plan to get on the road to approval.... we can afford the rent we are paying now and the mortgage with everything would actually end up being less than what we are currently paying.

[NC_Mtg_Loaner]

Many lenders can approve you with an FHA loan if your DTI is in the 50% range so chances are you had a lender that didn't want to help you figure out a solution.

Of course you would want to obtain additional opinions and it's likely that any valid collection account is something you would want to settle so without knowing much more about it I would say settle it if valid but if it's a medical collection and  you are applying for an FHA loan then it would be overlooked and not hinder your progress.  

You may want to lower your monthly liabilities on the credit cards before you re-apply somewhere if that's possible as it could increase your credit scores and enhance any loan program options to be offered.

Having an extra year of tax returns may help as well.....(assuming you are preparing to file these in the next few weeks)

[Anonymous]

Thank you for your input. The collection is a Verizon collection which I have tried to work with them on but they are not willing to compromise. Half of it was their fault and half of it was my fault. I offered to split the difference with them a couple of times but I may just have to dig in.  We were hoping to time the home purchase with the time the lease expired but we may give it another 6 weeks after getting my credit card debt all but eliminated and the taxes filed if that's the case. The balances are pocket change on most of them like $27 on my Kohls card. The largest balance of $800 is on my Discover card but it has a $12k limit so the utilization isn't out of control on it. If concentrating on just my cards is the golden ticket then that's totally doable. I just wished the loan officer would have said do this this this and this and call me in 60 days. Aggravating!

[VALoanMaster]

Hi Jjpopp82,

I'm guessing the lender tried to get you pre-approved for a conventional loan (because you could possibly get approved with just 1 year of self employment) and that's why they denied the loan. Conventional loans are capped at 50% for the DTI.

In order to help you with the DTI numbers we will need to the monthly payments for all of the debts on your credit reports & the monthly income numbers for both of you.

[Anonymous]

From my best estimate and knowledge I believe our total obligations total $1650 a month (over estimating a little bit) That would include 2 car payments and current minimums on all cards and student loans. Total gross income is $6300. $3430 of that is my monthly fixed income. If we have to wait we understand and it’s not a big deal. If paying off $600 in credit card debt and a collection is what gives us a green light then great! Paying off debt to begin with is always a good idea so no arguments there. The only thing I can think of why the DTI was so high was the paycheck stubs for the 30 days for my husband and 2017’s taxes where he was unemployed for 6 months which was expected due to the move to a new state. December’s income was a little less than normal due to him missing about 30 hours work due to being sick and then equipment failure at the job site that delayed activity for a couple of days. I think we chose the wrong time to apply.

[VALoanMaster]

Ok, based on the numbers you provided, here is what I see.

Your gross income is $6,300 so 53% of that would be $3,339. Now subtract your debt from that number to see how much is left for a mortgage payment. $3,339 minus $1,650 = $1,689 left for a mortgage payment.

Now there are still a couple of questions.

1) Did the lender accurately calculate your income or did they go too conservative in their calculations?

2) What type of loan did you apply for? If you applied for an FHA loan then you can go as high as 56.9% on the DTI as long as you get an approval through an Automated Underwriting System (AUS) but if you applied for a conventional loan, the DTI is capped at 50%*.

I would get a 2nd opinion from another lender.

[Anonymous]

I believe we applied for a conventional loan and I’m nearly positive that the calculations they used were skewed a little due to the 30 day paystubs from my husband. His paychecks were not full 40 hour checks on any of those weeks due to the holidays, being sick and the equipment failures. This of course is highly abnormal so I’m pretty sure they just seen it as him being a part time employee and averaged it out and that made our DTI skyrocket on paper. I honestly think we will wait at least until March and apply again before resigning the lease for April and hope they ask for 2018 taxes. Our 2017 taxes had office expenses for my transition to work from home and I certainly don’t need a new computer and furniture every year so those were not regular costs for my self employment. I’ll also be able to eliminate most of my credit card debt and take care of that collection. I certainly appreciate your insight because I was just frustrated they wouldn’t even give us guidance or an action plan for 6 months or a year down the road. Here I was worried about the credit scores and those weren’t even the issue.

[VALoanMaster]

I wouldn’t wait so long to get another opinion. You want to give yourself enough time to address any potential issues as well as enough time to find a home. I know it’s frustrating but not all lenders are the same. There are lenders that WILL work to help you get into a home.