Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Shmuel has over two decades of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. Shmuel provides a uniquely holistic approach to comprehensive real estate and financial matters that goes well beyond any single transaction. Shmuel is an award-winning financier recognized for maximizing the short-term and long-term objectives of his client. As a contributing writer to many local and regional newspapers and publications, his insights have been featured in the media for many topics, including mortgages, personal finance, appraisals, and real estate trends.
With tax reform, rising interest rates, and a bubbling stock and real estate market all over the news – determining their fiscal impact is on the forefront of all our minds these days. It all boils down to “how does this affect me?!” The simple answer is that what happens in the broader economy eventually trickles down, and take its toll on the pocket of a consumer one way or another. Businesses and individuals alike continuously try to manage their ongoing cash-flow requirements – constantly budgeting and evaluating their income versus expenses judiciously.
Specific to mortgage qualifications, bank underwriters are often looking at a very specific formula of a borrower’s proposed monthly housing expenses, plus other pre-defined credit related expenses, compared to their taxable monthly income to make their analysis. This comparison ratio helps the lender understand your ability to manage your monthly mortgage payments, without being at risk of missing one. The lower the ratio, the more likely you can afford all your monthly expenses.
The housing expenses that a Lender focuses on is called “PITI.” PITI is an acronym that stands for “principal, interest, taxes and insurance,” which are the four main components that make up a borrower’s housing costs. Principal – this is the amount that you are paying specifically towards the actual amount that you borrowed when you took out the mortgage. Only a part of your monthly mortgage payment goes to paying down the principal. Interest – this is the extra cost that the lender charges for the service of lending you the money. A portion of your monthly mortgage payment goes to paying down the interest owed. Taxes – real estate tax costs are typically included in addition to your monthly mortgage payment, as part of a “escrow payment” each month. Property taxes will be accrued and paid by the lender as needed on your behalf. Insurance – this is the cost of insuring your mortgage and your home. Like taxes, your mortgage lender will typically include this as part of the escrow to make certain your insurance is in place and up-to-date.
When it comes to homeownership, and specifically to mortgage payments and qualification – I often say, just because someone qualifies for a specific mortgage, does not mean they can truly afford the payment! Conversely, just because someone can afford a specific mortgage payment, does not mean that they will be qualified for it. While the lender’s guidelines are a good place to start, a mortgagor should consider how their unique lifestyle affects how much of a mortgage they should take on. For instance, if you send your children to a private school, that is a major expense that lenders don’t typically account for. Or maybe you like to spend a lot on traveling or entertainment?! Similarly, if your student loans are being deferred and will soon be up for repayment, or an upcoming car lease is in the works, these are all items that may not end-up making their way on to a formal loan application for review. This can be to one’s benefit as well as detriment. It might not be until too late in the evaluation that some of these items ring to attention.
I was recently contacted by someone who told me after submitting all of their paperwork to a local bank, and being assured that their loan would be approved, they ultimately got denied after about 40 days of waiting. Naturally, I asked them what the issue was and was told, “something about our income calculations and ratios.” Mind you, this was a refinance loan, and everything was told to the bank officer in advance – and was exactly as presented on day one. After doing a little research, I was finally able to uncover the problem. The bank used a fictitious estimate to calculate the borrower’s current real estate tax payments, when the taxes were actually higher than what they estimated. When the figure was updated with the accurate number, it caused the “ratios” to exceed what the bank was able to accept.
There was nothing that they were willing to do further to reconsider the loan. Fortunately, I was able to use the accurate numbers, and restructure the loan slightly to get them approved. As I said earlier, not all qualified applicants are eligible for a mortgage, and not all eligible candidates are able to get approved. It takes a precise competence and understanding of your entire picture to help you make the best determination possible. Clearly not everyone is capable of doing that. What a PITI indeed.
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