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Author: holhealthprac Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127473  
Subject: Debt-to-income ratio if self-employed Date: 2/11/2013 10:38 AM
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I am self-employed and am trying to figure out if I could qualify to refinance my home. I have excellent credit (800+) and high enough annual income to qualify. I am not sure about how the debt-to-income ratio is determined for self-employed individuals. I've recently spoken to other self-employed individuals who have been turned down.

A little history. I bought my house in 2006 for $180,000. I had been self-employed for less than two years at that time, but I found a "creative" lender willing to work with me because I had excellent credit and cash assets. I put $60,000 down at the time and qualified for a 6.75% stated income loan. Equivalent houses in the area are currently selling for about $160,000 so I am not underwater. I currently owe $108,000 on the mortgage.

I have no debt other than the mortgage (no car loan, student loans, home equity loans, etc). However, I pay EVERYTHING by credit card in order to earn cash back. I pay them off every month by the due date, but my average balances look somewhat high. Someone told me that some lenders look at average credit card balances rather than minimum required payments when determining debt-to-income ratio. Is that true? Do I need to go cash only for a few months? Or do I need to pay down my balance every couple days to keep my revolving debt low? Will the balances in my business credit cards also be counted? Technically, they shouldn't be, since those are business expenses paid out of gross business income.

And then I also have questions about how income is calculated. Do they use my Schedule C? I have a $2000 per year depreciation write-off from the original purchase of the business. Will that $2000 be considered part of my annual income for purposes of qualifying?

If I call my bank about refinancing, do I need to ask for someone who specializes in self-employed borrowers or is this routine stuff?

Should I be requesting something more creative than a standard refi? I'd like to pay as little as possible at closing and increase my monthly cash flow.

I'm also able to pay down the mortgage somewhat if that will allow me a better deal.

Thanks so much in advance for your help!
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Author: Gingko100 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124727 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/11/2013 10:40 AM
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I'm self-employed and I've had no issues refinancing. they looks at income from last two years of tax returns, so if you are a sole proprietor, yes your schedule C.

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Author: holhealthprac Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124728 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/11/2013 11:32 AM
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Thanks Gingko100.

When you applied to refi, did the lender explain exactly how they calculate income and debt-to-income ratio for sole proprietors?

Do you know if the lender includes depreciation deductions as part of the income used to qualify? That would up my qualifying income by a couple thousand.

I know that if a lender uses average credit card balance to calculate debt-to-income ratio, I don't meet the 40% number. I pay the cards off every month, but my average credit card balance is high since I charge everything. If they use minimum required payment, I should be fine.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124729 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/11/2013 11:54 AM
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Hi HHP,

Someone told me that some lenders look at average credit card balances rather than minimum required payments when determining debt-to-income ratio. Is that true?
No

Do I need to go cash only for a few months?
No

Or do I need to pay down my balance every couple days to keep my revolving debt low?
No

Will the balances in my business credit cards also be counted? Technically, they shouldn't be, since those are business expenses paid out of gross business income.
No, your required minimum payments will count, not your balances.

Regarding your "business credit cards" if you personally guaranteed them (99.999% likely,) then they count.

And then I also have questions about how income is calculated. Do they use my Schedule C? I have a $2000 per year depreciation write-off from the original purchase of the business. Will that $2000 be considered part of my annual income for purposes of qualifying?
Yes, if its tight a good underwriter will add back in your depreciation.

If I call my bank about refinancing, do I need to ask for someone who specializes in self-employed borrowers or is this routine stuff?
Routine, unless its tight. Just call them, authorize a current credit pull, and have them run your data through the FannieMae/FreddieMac pre-underwriting engines to see what results they get. The algorithms are far more complex than you want to be concerned with yourself (if you can avoid it,) and the odds are strong you'll approve without doing too many backflips.

Should I be requesting something more creative than a standard refi? I'd like to pay as little as possible at closing and increase my monthly cash flow.
A 5 yr ARM is preferred for aggressive savers.

I'm also able to pay down the mortgage somewhat if that will allow me a better deal.
In order to do so you would be depleting your reserves....
Is current cashflows really more important than your accumulated cashflows?
(They may be... but I almost never find that to be the case.)

Helpful?
Dave Donhoff
Leverage Planner

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Author: holhealthprac Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124730 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/11/2013 12:43 PM
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Thanks Dave!

That's exactly what I needed to know. I should be in fine shape. I'm a little close on the required income, but I've never been turned down for anything. I get pre-qual letters in the mail all of the time.

As you suggest, I'll call and ask them to run my data through their pre-underwriting engines to find out what they can offer to me.

And, yes, I'd rather not deplete cash reserves unless I need to do it to qualify.

Thanks for your help!

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Author: richinaz Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124733 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/11/2013 6:59 PM
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Do I need to go cash only for a few months?


I've heard stories where people suggest it is better to pay off the credit card prior to the billing date to lower the average balance. Is that a myth?

I don't carry balances but like the original poster I use my ccs for almost everything (I can literally go many, many months on a single $100 withdrawal).

I've never really worried about it too much since I've never been turned down for a loan but am curious. Often things that affect scores don't make much sense such as the length of time you've had a cc. What difference is it if you get a new card every year for 15 yrs or just had one card the whole time as long as you pay the debt?


Just curious
Rich

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124734 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/11/2013 7:32 PM
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I know that if a lender uses average credit card balance to calculate debt-to-income ratio, I don't meet the 40% number. I pay the cards off every month, but my average credit card balance is high since I charge everything. If they use minimum required payment, I should be fine.

It depends on the lender. The guideline at my best priced wholesale source is that 5% of the balance at the time the credit is pulled will be used to calculate DTI. This lender doesn't allow paying off of revolving accounts to qualify unless the application includes a letter from the creditor stating that the account is closed to further purchases. Therefore, if you wanted to use this best priced lender, you'd have to pay cash for a while until your credit report shows all revolving accounts with a zero balance.

At other lenders, you can show that you have a practice of paying all accounts to zero every month, such as copies statements for six months. Then 5% of the balance would not be counted as an ongoing monthly liability.

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124735 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/11/2013 7:35 PM
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I'm also able to pay down the mortgage somewhat if that will allow me a better deal.

At my best priced wholesale source, pricing is .25 better to fee (not rate) for LTV <= 60%.

Depending on the loan amount, .25 better to fee may not result in enough savings to warrant, as Dave noted, depleting your reserves to pay down the balance.

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Author: holhealthprac Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124736 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 8:42 AM
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"The guideline at my best priced wholesale source is that 5% of the balance at the time the credit is pulled will be used to calculate DTI."

So, SOMETIMES, with some lenders, it DOES make a difference to go cash only for a while.

I would hate to give up all of the cash back I earn on those cards. The card I use most often can be paid off at any time, multiple times throughout the month. I could start a practice of paying it off once or twice a week for a few months rather than paying right before the due date. That should keep my average balance low enough.

I would be able to show 6 months worth of statements proving I pay off all of my cards every month if a lender asked.

Thanks for your help, CCinOC!

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124737 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 11:07 AM
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I would hate to give up all of the cash back I earn on those cards. The card I use most often can be paid off at any time, multiple times throughout the month. I could start a practice of paying it off once or twice a week for a few months rather than paying right before the due date. That should keep my average balance low enough.

Your credit report is a snapshot of your credit activity on the day the credit report is pulled.

Each creditor reports to the bureaus at different times of the month.

Therefore, you would have to either (a) stop using credit for a while (2-3 months) so that your credit report snapshot shows zero balances at all creditors; or (b) find a lender that will allow you to demonstrate that you pay credit cards off each month.

Paying off once or twice per week won't help because you have no control over your creditors' reporting practices.

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124738 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 11:55 AM
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Paying off once or twice per week won't help because you have no control over your creditors' reporting practices.

I think it has a high likelyhood of helping keep the balance low- and from what I can see it won't hurt anything. (other than costing extra time to check the balance and make the payment, and having on average a little less $ in checking account)

Depending on when the bank reports to the credit bureau, and when the OP pays, the OP might normally have 2, 3, 4, 5, or 6 weeks worth of purchases. (worst case is they report the day before OP pays, and therefore it's all of the previous bill's purchases, plus 2 weeks worth of purchases since then.)
If instead the OP checks the balance weekly, and pays weekly, the largest the balance can be is just over 1 week's worth of purchases (1 week plus whatever time it takes to get the payment there)

In the past, I know that some banks will tell you when they report - so you could pay just a few days before they send their data to the bureaus.

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124739 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 1:13 PM
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I would hate to give up all of the cash back I earn on those cards.

I have heard (so insert big, fat rumor alert here) that many cards report your statement balance to the bureaus. If that is correct, paying the balance right before the statement date should serve to dramatically lower the reported balances.

But we don't have to deal with rumors. You can just run your own test.

You get a free credit report from every bureau each year. So take advantage of that.

Figure out your statement date, then pay your outstanding balance a couple of days before that date (to allow the bank a little time to get the payment posted to your account.)

Wait a couple of weeks, then order up a copy of your credit report from ONE of the bureaus. Look for that card, and see what balance they are reporting. If it's not the pretty low balance from your most recent statement, try to figure out what balance that is. Try using your card's online access to see your balance at each day over the last couple of months. With a bit of luck, the number should pop out at you.

Armed with that new information, try again next month, but get the free credit report from a different bureau. Hopefully, you'll have success at getting a low number to show up on that report. If not, you've got one more shot at the last bureau following month.

On the other hand, paying once a week should do a pretty good job of keeping the reported balance low. And would be a lot less work.

I just like figuring out systems like this. Particularly systems that are easy to game - and due to their blatant illogic almost deserved to be gamed.

--Peter

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Author: holhealthprac Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124740 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 1:19 PM
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It would be a lot of work to stop using credit for all of my regular business expenses. Right now, all of my monthly business expenses are automatically charged to the business card, earn at least 1.5% cash back, and the balance is automatically paid in full on the business credit card due date. I'd rather not write all of those checks or give those companies permission to autodebit my business account, so 100% cash only is probably not realistic for me.

If I stick with 1 personal card and 1 business card and pay down the balances regularly through the month, I can probably get my average balance below $150/month. That's a huge change from $1500-2000 which is typical for me since I usually wait until the due date to pay.

So I wouldn't be able to get the best bargain basement rate, but I should be able to meet the 40% DTI number to qualify for a good rate.

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124741 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 1:49 PM
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I think it has a high likelyhood of helping keep the balance low- and from what I can see it won't hurt anything. (other than costing extra time to check the balance and make the payment, and having on average a little less $ in checking account). Depending on when the bank reports to the credit bureau, and when the OP pays, the OP might normally have 2, 3, 4, 5, or 6 weeks worth of purchases. (worst case is they report the day before OP pays, and therefore it's all of the previous bill's purchases, plus 2 weeks worth of purchases since then.) If instead the OP checks the balance weekly, and pays weekly, the largest the balance can be is just over 1 week's worth of purchases (1 week plus whatever time it takes to get the payment there). In the past, I know that some banks will tell you when they report - so you could pay just a few days before they send their data to the bureaus.

This is like running through raindrops hoping you won't get wet. Why doesn't the OP just stop using credit for two cycles? Easy peasy.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124742 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 6:25 PM
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I just like figuring out systems like this. Particularly systems that are easy to game - and due to their blatant illogic almost deserved to be gamed.

It only seems to be gaiming the system because you (we?) don't carry a balance. Most people don't pay their cards off each month, so for MOST people the instantaneous snapshot is equivalent to the running balance, credit-wise.

In essence, it is we pay-offers (is that a word?) who are gaming the system, since what we are doing is essentially using the credit card as an inverse checking account.

In my experience, credit card companies report the balance of the monthly bill. That would make sense -- they have to make that monthly snapshot they send to you, and there's no reason to create another snapshot to send to the credit bureau.

And, yes, in my experience, you can make a payment just before the billing statement and reduce the balance that gets reported. If you want to be really clever, pay *more* than your then-current balance, to cover any last-minute charges that might come in.

It all works out good -- you still get your cash-back bonus because that is computed on the charges that you make, not on the statement balance.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124743 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 6:29 PM
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This is like running through raindrops hoping you won't get wet. Why doesn't the OP just stop using credit for two cycles? Easy peasy.

Not easy at all. Try buying things online without a credit card. Try renting a car, or stay at a hotel, or buy a plane ticket.

But what he wants to do *is* easy. Just pay down the credit card weekly or just before the statement date.

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124744 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 7:09 PM
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But what he wants to do *is* easy. Just pay down the credit card weekly or just before the statement date.

I predict the OP will not be able to accomplish his goal. He doesn't know the cycle of reporting for each creditor.

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Author: holhealthprac Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124745 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 7:50 PM
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I agree it would be very difficult to get the reported balance to 0, but I can certainly get the balance down to a small number by paying down the balance throughout the month.

I probably have 8-10 regular monthly charges on my business card (advertisers, web hosts, etc). Going off credit completely would mean calling those customer service centers, sitting on hold on ridiculously long phone queues, and then either authorizing them to automatically debit my business account or my writing out those checks by hand every month. Then, a few months later, I would call them all back and go back to putting everything on the credit card. And all that between seeing paying clients. Not worth my time and effort. It's very little effort for me to pay down the cards as I go. I could literally do it daily.

As suggested, maybe I'll experiment with it. I'll pay down the balances as I go for a couple months, pull a credit report and see what the reported balances look like. Last month was higher than usual as I had a big car repair bill and a big oil delivery in the same month, so I intend to wait a few months anyway.

And, when I call around about refinancing rates, I can always ask how that particular lender calculates DTI. Some of them do use minimum required payment. In that case, I wouldn't have to jump through any hoops.

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124746 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 10:12 PM
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I probably have 8-10 regular monthly charges on my business card (advertisers, web hosts, etc). Going off credit completely would mean calling those customer service centers, sitting on hold on ridiculously long phone queues, and then either authorizing them to automatically debit my business account or my writing out those checks by hand every month. Then, a few months later, I would call them all back and go back to putting everything on the credit card. And all that between seeing paying clients. Not worth my time and effort. It's very little effort for me to pay down the cards as I go. I could literally do it daily.

I don't appear to be capable of explaining the process of how creditors report to the bureaus in an understandable way, so good luck with your efforts.

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124747 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 10:25 PM
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I don't appear to be capable of explaining the process of how creditors report to the bureaus in an understandable way

I think you've explained it fine.

What you don't seem to be capable of is understanding that a balance reported to the bureau of $100-$500 (because it's been paid off once a week) is going to look better for lender than the $2500 balance that will show up if it's only paid monthly.

FWIW, I would think that just making sure you overpay each month by $2K (or whatever) would give the same sort of result, without having to make weekly payments.

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124748 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 10:52 PM
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Most people don't pay their cards off each month, so for MOST people the instantaneous snapshot is equivalent to the running balance, credit-wise.

Most is a bit of an exaggeration.

PSU

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124749 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/12/2013 10:55 PM
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FWIW, I would think that just making sure you overpay each month by $2K (or whatever) would give the same sort of result, without having to make weekly payments.

Correct. Just pay it a few days before the statement closing date, so the balance is near zero.

Despite what CC seems to believe, I can't imagine that a card company will report a balance that is other than the statement balance. They may or may not *report* it on that date, they may report on the 1st of the month or something. But I can't imagine that they report an interim balance, just the statement balance. Certainly, the times I've looked at my credit report or had it pulled, that's what was on the report--the last statement balance.

But, who knows? CC may be right and me wrong. She just seems to delight in being difficult.

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124750 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 1:19 AM
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FWIW, I would think that just making sure you overpay each month by $2K (or whatever) would give the same sort of result, without having to make weekly payments./b>

Nope.


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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124751 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 1:21 AM
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But, who knows? CC may be right and me wrong. She just seems to delight in being difficult.

Whatever. Try as he might, the OP, despite his elaborate strategy, will not pull a credit report with zero balances.

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124752 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 2:50 AM
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Try as he might, the OP, despite his elaborate strategy, will not pull a credit report with zero balances.
Are you deliberately ignoring the point?
The goal is NOT to get zero balance.
The goal is a significantly lower balance (like 1/4 or 1/8 of what they normally would have reported to experian, etc. for a balance)

"I would think that just making sure you overpay each month by $2K (or whatever) would give the same sort of result, without having to make weekly payments."

Nope.


If I normally charge $600/week to a CC, and the normal bill is $2400, but I pay $4400 this month, so my next bill is $400 - and I still pay $2400 that month, my next bill will be $400 again - and I keep paying $2400, and my balance is now always less than $400.
$400 (or less) is what's going to be reported by the bank.
If you really think something more than that would be reported to experian, etc, please share what you're basing that belief on.


For those who say balance reported to the bureaus is the monthly statement balance - that wasn't my experience ~2 years ago with a visa card. But it might be different for different banks.

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124753 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 6:56 AM
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FWIW, I would think that just making sure you overpay each month by $2K (or whatever) would give the same sort of result, without having to make weekly payments.

My Mastercard flat out rejects overpayments. This happened to me when the bank I have two of my credit cards through applied the wrong payment to each account, resulting in one underpaid and one overpaid, rather than both paid off.

Our credit gets dinged every time because we have a low limit on our cards, and often charge them up to near the max. The fact that we could have a credit limit 10X what we carry now on our cards, or that we pay them off in full every month does not keep our credit from getting dinged for "high" balance:credit limit. That said, it is still close to 800, so I don't really care.

IP

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124754 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 7:00 AM
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My Mastercard flat out rejects overpayments. This happened to me when the bank I have two of my credit cards through applied the wrong payment to each account, resulting in one underpaid and one overpaid, rather than both paid off.

Let me clarify that. I can pay more than is on the bill if I have charged more since the statement was cut. Calling the 800 number tells me how much debt has been charged on the card to date. I can submit that amount, even if it is more than what is listed on my payoff bill.

IP

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124755 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 9:13 AM
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Holey moley folks.... let's see if I can put this thread out of its misery by relaying a recent file I closed. It was just on the tippy 'edge' of debt-to-income ratios, and the credit cards (which were normally paid in full each month, but averaged about $500 balance) had to come in under $300 balance total, among both (not because of the balance, but because of the resulting calculated minimum payment (2% of balance,) which affected the DTIs.)

Steps;
1.) Get automated approval (Fannie/Freddie automated engines.) These engines allow you to manually over-ride their credit pull, *or* manually edit the income figures... but you then have to prove the figures with documentation,

2.) Underwriting reviewed, stipulated, and ultimately cleared everything *BUT* sufficient income (meaning, too much debt payments,) based on the credit balances showing on the trimerge credit reports.

The Magic;
3.) We had the clients pay off both cards and ask their card anks to suspend any autopays for about 10 days, while we had the credit agency pull "supplemental reports" (which are account-specific targeted credit pulls,) showing the zero balances.

DONE!

It all starts, however, with the automated approval findings... so don't torture yourself trying to perfectly shape your numbers before you have the findings to navigate from.

Dave Donhoff
Leverage Planner

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Author: holhealthprac Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124756 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 12:03 PM
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Thanks Dave, LOL!

That sounds very close to my situation. The refi prequal letters I've been getting all indicate a 40% DTI will get me the best rate. Based on my credit score and cash assets, I'm sure I can find a lender happy to do your "Magic" step.

So funny that I have to prove my ability to make a LOWER monthly mortgage payment than I've been successfully making these last few years.

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124757 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 1:03 PM
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The Magic;
3.) We had the clients pay off both cards and ask their card anks to suspend any autopays for about 10 days, while we had the credit agency pull "supplemental reports" (which are account-specific targeted credit pulls,) showing the zero balances.


As I said, my best wholesale source doesn't allow paying off revolving debt to qualify. One must present a credit report with the zero balances already in place. Therefore, one must stop using credit for a while to definitivelyi allow this to happen. If one isn't too concerned with pricing (of the loan), then do whatever.

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Author: crackdclaw Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124758 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 1:06 PM
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The refi prequal letters I've been getting all indicate a 40% DTI will get me the best rate.

Hey hol,

Appears you have your answer on how DTI is calculated with regards to credit card balances that get paid in full each month. I know your concern is based on being near the 40% DTI. I've not heard that number used in the past. On Conforming loans under $417,000. my understanding is there is a hard stop at a 45% DTI. You probably have plenty of space. On loans that are conforming, but at the next loan size threshold ($417,001 up to $625k) my understanding is that DTI has a hard stop at 41%. However, these are the guidelines my bank uses and other lenders may have different guidelines.

The one item I find confusing is an interest rate being based on DTI. There are many variables involved in determining rate, but on a Conforming loan I do not know of any bump to rate based on DTI at various thresholds. You're either under 45%, or declined.

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Author: holhealthprac Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124760 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 2:20 PM
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Hey Crackdclaw,

Thanks for the info.

From the fine print on one of the prequal offers: "The amount of the loan and the exact interest rate will depend on your creditworthiness, the property used as collateral, your annual income, your debt-to-income ratio, and the loan-to-value ratio of your collateral."

Debt-to-income ratio is the only one of the above that is "iffy" for me. I came across the 40% DTI number on several different websites/offers. I have also seen the 45% number during my research. I figured if I could understand how DTI is calculated, and could easily lower it, I would put myself in a better position when I applied.

It's very possible that some lenders treat DTI strictly as pass/fail and do not use it to adjust the rate.

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124764 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 3:37 PM
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The one item I find confusing is an interest rate being based on DTI.

There are no conforming interest rates based on DTI. One either qualifies at the best priced lender--or not.

For example, at my best priced wholesale lender, the lowest rate at "par"--no discount point to the lender; no rebate from the lender--is 3.25% for a 30 day lock. Max DTI is 45%.

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Author: crackdclaw Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124766 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 4:04 PM
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There are no conforming interest rates based on DTI. One either qualifies at the best priced lender--or not.

Yes, you're aware you are confirming what I suggested to the OP. I'm not aware of any price bumps based on DTI. I used the word "confusing" as to the OP's statement that rates advertised to him suggested rate was based on DTI ratio. My response was at my bank you're either under 45% DTI, or you're declined and I did not know personally of any lenders that had a price hit based on DTI thresholds. However, in no way did I want to speak to the whole spectrum of lenders, and would not say with a definitive "there are no conforming interest rates based on DTI"

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124767 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 2/13/2013 4:10 PM
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I was making a distinction of conforming vs. other types of products. There's no price bump for DTI for conforming. But, for example, at my best priced niche lender, there's a hit for

DTI>40 and <=45 [minus .25]

In that case, the OP would need to be careful his DTI stays <= 40%.

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Author: holhealthprac Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124989 of 127473
Subject: Re: Debt-to-income ratio if self-employed Date: 3/24/2013 8:36 AM
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KahunaCFA,

Thanks for your thoughts. I probably won't tell them to pound sand - LOL!

I "retired" from an engineering management position in 2005 at the age of 42. I make significantly less money than I used to, but my work is very rewarding. I expect to have more discretionary income in retirement than I do today. I don't mind living simply in exchange for the slower, more rewarding lifestyle.

As most self-employed small business owners do, I do everything I can to keep my taxable income as low as possible. As in my personal life, I pay off my business credit cards every month and earn cash back on every expense, but always hold the money as long as possible.

For now, I'm keeping my balances low and will apply for the refinance in a few months. In a worst case scenario, I can pay down the loan to get a better rate.

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