How are Mortgage Interest Rates Determined?
January 30th, 2007 Categories: Mortgage News
This will be the first of 9 posts regarding mortgage qualification credit risk factors, which are the components that drive what mortgage programs and interest rates anyone and everyone qualifies for. They include:
- Property Type
- Property Use
- Income and Asset Documentation
- Loan Type
- Loan Amount
- Loan Purpose
- Middle FICO (credit score).
- Appraised Value or Purchase Price (whichever is lower)
- Zip Code
Ill begin with the most complicated: Income and Asset Documentation.
Income and asset documentation is the most misunderstood and error-prone aspect of mortgage qualification. The borrower and the broker both need to carefully calculate and present adequate income and assets in relation to the mortgage program’s predefined ratios. If an error is made upon loan submission, it will either get denied or unfavorably priced (higher interest rate).
Full Income Verified Asset (FIVA, "Full-Doc")
Income must be documented high enough to qualify for mortgage using the mortgage programs standard Debt-to-income ratio (DTI) guidelines. For example:
- The DTI ratio needed to qualify for a specific mortgage is 50%.
- Principle Interest Taxes Insurance monthly payment or PITI = $1,500/Month.
- Borrower credit bureau reports $800/month in other debt (auto, credit cards, student loans, other mortgages).
- $1,500/Month PITI + $800/Month other debt = $2,300/Month in total debt.
- Borrower must document at least $4,600/month in income ($2,300/50%) to qualify for the mortgage.
Income Documentation:
Salaried/Hourly:
- 2 most recent and concurrent yrs W-2.
- 2 most recent concurrent pay-stubs.
Self Employed and/or Other Income:
- 2 most recent and concurrent business and/or personal tax returns..i.e. 1040, Schedule C, and/or K-1 all pages signed by the borrower.
- 2 most recent and concurrent months personal and business bank statements (all pages).
- Rental Property Income: Tax returns. Leases, appraisal summaries with rent reports.
Asset Documentation:
Borrower must demonstrate anywhere from 2 to 10 months worth of subjects total monthly mortgage payment or PITI, depending on Property Use. Higher cash reserves are typically required for investment property. Lowest cash reserves are required on a Primary Residence. For example:
- Mortgage program requires 2 months PITI in seasoned assets to qualify.
- PITI payment = $1,500/Month. $1,500 (payment) x 2 (months) = $3,000 in documentable assets in order to qualify.
- Borrower must provide 2 most recent, concurrent monthly bank statements OR most recent quarterly statement for any/all accounts that support asset verification amount (Checking/Savings 401(k) IRA Stock Brokerage Account)
How Much Do I Need To Make? Affordability Calculator PITI Calculator
Stated Income, Verified Assets (SIVA)
Borrowers wishing to obtain any type of Stated documentation loan usually need to provide proof of at least 2 years self-employment. Accepted proof includes:
- Letter from CPA stating your filing 2 yrs tax returns via CPA.
- 2 years most recent concurrent business licenses.
- 2 years most recent concurrent tax returns (actual income numbers are traditionally blacked out), Schedule C, or K-1, whichever apply.
Income Documentation:
Income must be verbally stated by the borrower at a level that qualifies for the mortgage using the programs standard Debt-to-Income ratio (DTI) guidelines and is consistent with borrowers occupation. Example:
- The DTI ratio needed to qualify for a specific mortgage is 50%.
- Principle Interest Taxes Insurance monthly payment or PITI = $1,500/month.
- Borrower credit bureau reports $800/month in other debt (auto, credit cards, student loans, other mortgages).
- $1,500/month PITI + $800/month other debt = $2,300/month in total debt.
- Borrower must verbally state at least $4,600/month in income ($2,300 / 50%) to qualify for the mortgage.
Asset Documentation: As per FIVA/Full Doc above How Much Do I Need To Make? Affordability Calculator PITI Calculator
Stated Income Stated Asset (SISA) Income Documentation:
Income as per SIVA above
Asset Documentation:
- Amounts must be verbally stated to display anywhere from 2 to 10 months worth of subjects total monthly mortgage payment or PITI, depending on Property Use.
- Higher cash reserves are typically required for investment property.
- Lowest cash reserves are required on a Primary Residence.
How Much Do I Need To Make? Affordability Calculator PITI Calculator
No Ratio Loan (NIV)
Income Documentation:
- Income is not stated and employment is not verified
- Program DTI requirements are waived.
Asset Documentation:
- Documentation must display anywhere from 2 to 10 months worth of subjects total monthly mortgage payment or PITI, depending on Property Use.
- Higher cash reserves are typically required for investment property.
- Lowest cash reserves are required on a Primary Residence.
How Much Do I Need To Make? Affordability Calculator PITI Calculator
No Income, No Asset (NINA)
Income Documentation:
- Income is not stated or verified.
Asset Documentation:
- Assets are not stated or verified.
- Employment, income, and asset information is completely omitted from the 1003 application—name, address, SS#, Drivers License and other identity disclosure documentation is usually all thats required for a No-Doc loan.
How Much Do I Need To Make? Affordability Calculator PITI Calculator
Nice post and clean descriptions Jeff.
The one thing I would take issue with is your statement that on No Ratio and Stated Income/Stated Asset loans, “Income is not stated and employment is not verified.”
For both No Ratio and SISA documentation types, two years employment history must be stated on the 1003 and verified prior to close.
For salaried folks, a verbal verification just prior to funding will be required. For self employed, a business license or CPA letter are the most commonly requested forms of verification.
There is a category we refer to as No Doc loans. In this case, employment is not stated on the application or verified in any way prior to close Of course, LTVs are often more limited, higher Fico scores required, and pricing is a little steeper.
Thanks again for a great job. I look forward to the rest of the series.
Thank you Mark…
NINA = No Doc (in my head at least) and should have been described as such…thx for pointing that out…although I didn’t see where my SIVA & SISA doc loan description state:
“Income is not stated and employment is not verified.” ?
I agree, SIVA and SISA loans require the disclosures you describe above…
In my experiences No Ratio loans have not required income be stated or verified, although this could be a variance in lender policy?
Thx again for the comment
Sorry, I see you use NINA to mean the same as my “No Doc”. ~;>)
So the main difference is on the No Ratio NIV where you state:
“Income is not stated and employment is not verified”. Out here in California, the employment is verified and two years job history is required. But, but I’m certainly picking nits at this point.
Thanks again, and great job Jeff!
[…] In the eye of the hurricane, where mortgage fraud mixes with over-inflated real estate prices, lies the stated income loan. For those unfamiliar with this bit of mortgage slang, stated income loans allow a borrower to claim a level of income they don’t have to prove. How’s that for temptation?? Care for a bite of apple? […]