INTRODUCTION

The borrower's income stability and outstanding liabilities impact capacity to repay the mortgage loan. There are several aspects of capacity evaluation such as ratio(s), employment/income stability and liabilitiesTop of Form

A. Ratio(s) Analysis

Debt ratio(s) are based on the borrower's stable monthly income and are the primary indicator used to determine capacity to repay the mortgage.

 

Evaluate the ratio(s) to determine if the loan is an acceptable risk. Most products/programs have a maximum total debt ratio of 43%. Some programs have different debt ratio guidelines. See program guidelines and Product Descriptions for specific requirements.
 

Evaluate changes in present versus proposed housing expenses and consider future increases associated with adjustable rate products in the overall capacity risk assessment.

 Housing Expense To Income Ratio

The housing expense to income ratio equals the total monthly housing expense divided by the qualifying monthly income.

Total Debt Ratio

The total debt ratio is the sum of the monthly housing expense and all long term debt divided by the qualifying monthly income.

B. Liabilities Analysis

Purpose

This section provides guidance in determining which liabilities should be included in the borrower's long term debts for calculating ratios. If the borrower does not qualify with all the debts, the debts should be analyzed to determine whether any debts could be excluded. This section includes requirements for exclusion of debts.

Revolving Accounts

Revolving accounts, including credit cards, department store accounts, equity lines and other open-ended accounts, are accounts that do not fully amortize and have balances and payments that vary from month-to-month.

The minimum payment amount for all revolving accounts with a balance must be included in the total monthly obligations. If a revolving charge account shows a zero balance, do not include a payment in the calculations. Payoff of revolving debt to qualify is allowed, but the pay-offs must be handled through AmMAC’s loan closing.

If the credit bureau does not reflect a payment on a current reporting liability, a payment should be calculated as follows:

 

Revolving: The greater of $10 or 5% of outstanding balance.
 

HELOC: Payments on any home equity line of credit with an outstanding balance must be included in the monthly obligation. If a payment is not disclosed on the credit bureau, a copy of the customer’s billing statement should be obtained. If that is unavailable, the imputed payment   should be 1% of the outstanding balance.

Long Term Debt

Long-term debt is defined as the total of all continuing monthly obligations.

Pay Off vs. Pay Down

Accounts may not be "paid down" to 10 months or less to allow the Borrower to qualify. Installment or Mortgage accounts must be paid in full. Pay off of revolving accounts in order to qualify the Borrower is not allowed, unless the account being paid off is also closed. If a revolving account is being paid off or paid down with part of the loan funds, but is not being closed, then AmMAC’s qualification analysis will continue to use the payment for that account as specified on the credit report, not computed on any reduced balance resulting from the pay down.

American Express

There are two types of American Express accounts: one allows for monthly payments and the other requires payment in full at the end of the month. When the American Express account allows for monthly payments the requirements for revolving accounts must be followed.

When the American Express account requires payment in full at the end of the month no payment is included in the total monthly obligations because the entire balance will be paid. The calculation of total assets for down payment, closing costs and reserves, should be reduced by the amount of the outstanding balance, to account for that payment.

 Installment Accounts

Installment loans with remaining balances equal to more than 10 monthly payments must be included in total monthly debt unless they are being paid in full through AmMAC’s loan closing, then they can be excluded; those with 10 or fewer payments remaining can be excluded from the total monthly debt. Lease payments must always be included in total monthly debt regardless of the number of months remaining.

Deferred Payments                                                                                                      

Some debts may have deferred payments or are in a period of forbearance. These debts must be included in the qualifying ratio(s) if there are more than 10 months of payments remaining. When payments on an installment debt are not given on the credit report or are listed as deferred, documentation supporting the required payment must be provided.

Examples of documentation supporting the required payment amount include:

 

A direct verification obtained from the creditor, or
 

A copy of the installment loan agreement provided by the borrower, or
 

Student loan certification from the financial institution holding the loan.

Education Loans

Education loans with 10 or fewer payments remaining may be excluded from the qualifying ratio(s), but must be listed on the application.

Lease Payments

The monthly payment associated with a lease must be included in the total monthly obligations regardless of the number of payments remaining until the end of the lease term.

Interest Only Payments

A monthly payment for all interest only, single pay notes must be included in long term debt unless verified post-closing reserves are sufficient to pay off the note. However, if no payment is included because of adequate reserves, those same reserves cannot be counted towards meeting AmMAC’s reserve requirements.

Business Debt

Business debts for which the borrower is personally liable are usually included in long term debt. These debts may be excluded if the account has a satisfactory payment history and one or more of the following is provided as evidence that the business is paying the debt:

 

Minimum of 12 months of consecutive canceled checks from the business; or
 

Minimum 12 months business bank statements if the payee can be identified in the bank statement detail.

 Alimony / Child Support / Maintenance

All alimony and child support payments must be accounted for in the computation of total debt ratio if the monthly payments extend beyond 10 months. However, since there are tax consequences of alimony payments, AmMAC treats the monthly alimony obligation as a reduction from the consumer’s gross income when calculating qualifying ratios, rather than treating it as a monthly obligation. A copy of the divorce decree or court order is required.

Net Rental Loss

If the analysis of rental income on an investment property as described in Rental Income – Other than Subject Property - indicates a loss, the monthly net rental loss is included in the long term debts.

Taxes & Insurance – Non-Subject 2nd Homes

In addition to any mortgage debt owed on a 2nd home(s) that is not the subject property, taxes, insurance and HOA payments owed must also be included in monthly obligations when calculating qualifying ratios.

Mortgage Debt - Sale of Prior Home

The borrower's previous mortgage payment does not have to be included in long term debt as long as one of the following can be provided:

 

A copy of the HUD-1 from the sale of the real estate or
 

Evidence of a buyout through an employer relocation program. An executed buyout agreement where the employer/relocation company takes responsibility for the outstanding mortgage(s) is required to support excluding the PITI for the residence being sold to the relocation company.

If neither of the above applies and the sale of the home will occur after the closing of the new mortgage, then the PITI for the previous residence must be included in long term debt and the borrower must have an additional 6 months reserves over that required in the LTV Matrix, available post-closing, sufficient to cover the PITI on the residence that is still for sale.

Mortgage Debt - Rental of Previous Residence

If the Borrower intends to rent out their current residence after the close of AmMAC’s loan, then the PITI for the previous residence must be included in long term debt and the borrower must have 6 months reserves available post-closing, sufficient to cover both their new PITI as well as the PITI on their current residence.

Equity Loans

Equity loans that are secured by property other than the subject and that have remaining balances resulting in more than 10 payments must be included in long term debt.

Home Equity Line of Credit (HELOC)

Payments on any HELOC with an outstanding balance must be included in the monthly housing expense or in long term debt, depending on whether the primary residence or other real estate secures the line. See Subordinate Financing for treatment of HELOC when it is secured by the subject property. 

Subordinate Financing

Payments on closed end subordinate financing (installment loan) must be included in the monthly housing expense or in long term debt if the balance is greater than 10 payments.

Margin Accounts

  It is not necessary to include payments for margin accounts because the balance of the margin loan must be netted from the value of stocks in the brokerage account, prior to applying the allowable percentage allocation for reserve calculations. So calculation of reserves has already contemplated full payoff of the margin account.

Ready Reserve Accounts

Any ready reserve (overdraft protections or extended credit option) on a checking account must be included in the borrower's total monthly obligations if the outstanding balance is greater than 10 remaining payments.

Loans Secured by Financial Assets

Payments on loans secured by the borrower's financial assets (e.g. 401(k), IRA, stocks, etc) are not included in long term debt because they are voluntary payments and the reserve balance we have allotted for those accounts is net of any outstanding loans (i.e. assumes full payoff with funds from the account).

Contingent Liabilities

Contingent liabilities are debts that the borrower is not currently required to pay but may be required to pay in the future.

Co-signed Loans - The monthly payment on a cosigned loan with more than 10 payments remaining may be excluded from long term debt if there is evidence that timely payments are being made by someone other than our borrower. If the payments have not been paid on time, or there is no evidence that someone other than our borrower is making payments, the cosigned loan is treated as our borrower's own obligation. Copies of canceled checks for the last 12 months or a statement from the creditor indicating the account is current and the last 12 payments were all made as agreed, are acceptable documentation of payment history.

If transfer of ownership has not taken place, and/or if the debt is still showing on the Borrower’s credit report, then it must be included in their monthly payments and any late payments associated with loans on the property must be taken into consideration when reviewing the borrower's credit profile. In the case of mortgages, it would also count as one of the 4 allowable properties a borrower can have financed in total.

Pending Lawsuits - If the application, title, or credit documents reveal that the borrower is presently involved in a lawsuit or pending litigation, they are not eligible for financing with AmMAC.

Departure Residence Policy for Relocation Borrowers

Please refer to Mortgage Debt – Sale of Prior Residence for treatment of debt on retained homes. Please refer to Relocation Guidelines for other information relative to relocation guidelines.

Unrated Debts

The following information is required to document debts that are not showing on the credit report:

  • Mortgage – Note, Purchase Agreement & 12 months canceled checks, copies of R/E Tax document and Homeowners Insurance DEC page to prove T&I. Full PITI needs to be included in DTI calculation.
  • Other Installment or Revolving – explanation of the debt; the greater of the 1003 payment amount or the payment from our bank statement analysis must be included in the DTI calculation.

Mortgage Credit Certificates

Not allowed

Temporary Buydowns

Not allowed