-
HOW MORTGAGE BROKERS CALCULATE INCOME AND RATES
HOW MORTGAGE BROKERS CALCULATE INCOME AND RATES?
-
1 Reply
-
Every skilled and experienced mortgage broker strives to obtain the best mortgage terms for clients. Mortgage brokers perform income computations on the borrower and arrive at the inquiring interest rates. Typically, it depends on the borrower’s income, type of loan, and market dynamics. Here’s how they approach these calculations:
Earning Values
- As part of their function, mortgage brokers determine a borrower’s income to establish the amount that a borrower can seek to borrow and the DTI.
- In most cases, this is how they do it:
Examining Income Sources
Income From Employment:
- With salaried individuals and those on hourly wages, brokerage firms require someone to provide administrative documents such as paychecks, tax returns, and W-2 forms.
- Lenders require employer letters to determine the borrower’s income.
- Usually, consistent and documentable overtime, commissions, or bonuses can also be included.
Income from Self-Employment:
- Mortgage brokers usually ask self-employed borrowers for two years’ worth of tax returns.
- Income tax returns with all applicable cooperating schedules to calculate their average income.
- Mortgage brokers may allow business profits and losses or other financial statements.
Rental Income:
- Rental income can be recognized if a borrower has investment properties.
- In most cases, only 75 percent of gross rental income will be included.
- 25 percent reserved for the risk of vacancies or expenses.
Other Income Sources:
- Common inclusions are child support, spousal support, social security, disability, and investment income.
- Lenders will determine if the provided are stable, documented properly, and likely to last for the next three years.
Gross Monthly Income Calculation Salaried Employees:
- Salaried employees’ gross monthly income is derived from the total annual salary figure by division by twelve.
Gross Monthly Income
- Annual Salary divided by 12 months is the Gross Monthly Income.
- The employer’s employment offer letter and the borrower’s paycheck stubs and W2s determine the annual salary.
Hourly Employees:
- In the case of hourly employees, the income is calculated hourly.
- The hourly rate is determined by multiplying the number of hours worked in a week by 52 weeks and dividing the result by 12.
Gross Monthly Income
- Hourly Rate x Hours Per Week x 52 divided by 12 yields Gross Monthly Income.
- Hourly Rate[Hours Per week] multiple by [52 weeks]
Self-employed:
- For self-employed borrowers, the gross monthly income is usually the average of net incomes, reportedly reflected in two years’ tax returns.
Determining Debt-to-Income (DTI) Ratio
- Every lending institution needs to consider the DTI ratio since it determines the size of a mortgage they can safely extend to a borrower.
Mortgage brokers calculate it against the following formula using the given method:
- DTI Ratio=Total Monthly Debt Payments divided by the Gross Monthly Income ×(multiple by 100.
- DTI Ratio= Gross Monthly Income Total Monthly Debt Payments ×100
Front-End Ratio: The ending ratio limits the percentage of a borrower’s gross income allocated towards housing (homeowner monthly investment, property tax, insurance).
Back-End Ratio: On the other hand, the back-end ratio includes all monthly debt repayment obligations, such as car loans, educational loans, credit loans, and housing costs.
Calculating Mortgage Rates
It is the responsibility of mortgage brokers to compute the interest rate at which a borrower is eligible to borrow upon evaluating the following factors:
- Credit Score
Higher scores get better rates:
- It is generally believed that consumers with higher credit scores will always be charged lower interest rates than those with low credit scores.
- This is because lenders regard very high credit scores as lower risk.
- Therefore, offer better rates to the borrowers.
Loan Type and Term
Fixed vs. Adjustable Rates:
- The stable interest rate charged on fixed-rate mortgages will remain constant for the entire loan period.
- In contrast, the low initial rate in adjustable-rate mortgages (ARMs) is subject to variations due to various market forces.
Loan Term:
One reason short-term loans (like 15-year mortgages) are rated lower than long-term loans (30-year mortgages) is the less risk the lender takes.
Loan-to-Value (LTV) Ratio
Lower LTV Ratios Get Better Rates:
- The LTV ratio is calculated through a simple mathematical operation involving valuing and dividing a property by the loan amount.
- A lower LTV ratio means a higher deposit.
- Hence, a better interest rate.
- This is because the potential risk incurred by the lender is low.
Current Market Conditions
Interest Rates:
- Changes in the wider economic environment.
- Such as the Federal Reserve’s policies, inflation rates, or the bond market, will also affect monthly mortgage rates.
- Mortgage brokers oversee these factors to enhance their rates’ competitiveness.
Loan Amount:
Conforming vs. Jumbo Loans:
- Conforming loans that meet the limits set by Fannie Mae and Freddie Mac are standard loans with lesser interest rates.
- The opposite is true of Jumbo loans.
- Jumbo loans have higher rates due to enhanced risk associated with exceeding these levels.
Using Rate Quotes and Discount Points
Rate Quotes:
- To obtain the best deal possible for the borrower, mortgage brokers source for rate quotes from several lenders.
- Typically, the borrower’s financial profile and the managed rate are assessed against the raised rates.
Discount Points: A borrower may pay discounts before the loan to reduce the interest rate. Typically, a discount point is equal to one percent of a borrower’s loan amount, and this percentage in points can lower the interest rate by around 0.25 percent.
Fees and Closing Costs
Origination Fees: These are charges that the lenders apply to any loan requested by a client, often reaching between zero point five to one 1 percent of the total loan amount.
Other Closing Costs:
- Closing costs include appraisal, title insurance, escrow, and others.
- Mortgage brokers give the Loan Estimate form to explain these costs together with other costs to the borrower.
Providing Loan Estimates
- After the broker retrieves all essential information, they give the borrower a Loan Estimate (LE).
- This document provides the loan details, such as the estimated interest rate, monthly payments, and closing costs.
- It helps the borrower comprehend the total cost of the loan and the various lenders’ offers.
Mortgage brokers calculate borrowers’ incomes and assign mortgage rates to their clients after assessing their financial health, including their income sources, credit rating, and DTI ratio, among other aspects. Afterward, they search through different lenders for the available loan types and most suitable rates for the borrower. Most of the time, they ensure that the borrower can handle their repayment ability and receive the best possible rate considering their income conditions and the market.