It is a little known fact but not all lenders are created equal. There are vast differences on prepayment, rates, service but one think most people over look is how they calculate TDS. TDS or Total Debt Service is a percentage guideline that all lenders use to determine affordability. In most cases the maximum TDS one can have is 44%. The general calculation is
Principle + Interest (your mortgage payment) + Taxes + other monthly obligations (debt, car loans etc) divided by your gross income.
For example:
Mortgage Payment: $1000
Taxes per month: $100
Car Loan: $200
Gross monthly income: $4500
The TDS would be $1000 + $100 +$200 / $4500 = 28.8%
IF you add rental income in the mix there is a huge divergence on how this is calculated. They basically fall into two camps. Using our example from above:
Mortgage Payment (New Home): $1000
Taxes per month (New Home): $100
Car Loan: $200
Mortgage Payment (Rental Property): $800
Taxes per month: (Rental Property): $100
Gross monthly income: $4500
Rental Income $1100 per month
Option 1
PIT + Monthly outside obligations - ( rental income x 80%)
Qualifying income of applicants
[($1000+$100) + ($800+$100) + $200] – ($1100 *.80) / $4500
= TDS of 29.3%
Option 2
PIT + Monthly outside obligations
Qualifying income of applicants+ ( rental income x 80%)
[($1000+$100) + ($800+$100) + $200] / ($1100 *.80) + $4500
= TDS of 40.08%
As you can see this is a huge difference and could mean the difference between getting approved and not.
It is important to work with a mortgage professional that understands all these aspects in addition to having the several lenders to choose from. In this case, I have a few lenders that will do Option 1, however the majority of them do option 2.
Filed under: Mortgage
