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Enhance
Your Credit, Debt to Income Ratio and Reserves
Objective:
The
objective behind the “Credit and DTR Enhancement Process” is to
place you at an “Optimum” lending level (Credit Score, Debt to Income
Ratio, Appearance of Profitability, and Liquid Reserves), while
operating your Real Estate Investment Business. Remember…. Investing is
opportunity driven. You don’t want to hurry to achieve a “Top Tier” and
especially a “Lendable” level when you’ve already contracted a home to
close within 30-days. That places undue stress on you, your lending
staff, contradicts the concept of proper planning, and it is not
becoming of a sound relationship or a well run Real Estate Investment
Business. "Get all of your ducks in order now so when a property become
available, it's as simple as faxing us a contract, and searching for the
next great deal"
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Debt To Income Ratio / Qualifying Income
The Total Debt to Income Ratio will fall in line with
the
total monthly debt reportable to your bureaus.
Progressive highly recommends taking ample time
to thoroughly review and understand the "Credit
Enhancement" steps before reading this segment of the total
Enhancement Process. In particular the area that discusses "Restructuring".
In short,
you want as little monthly reportable debt to the bureaus as possible. This provides for easier qualifying, higher loan amounts
and/or in some cases, the difference between loan eligibility and loan
ineligibility. The appearance of little or no debt and property
profitability is well worth
its weight in gold.
Some of the steps (Noted below) to improve your
“DTR” have been previously discussed in the earlier segments of the
Enhancement process. The other “Tactics” noted below will require proper
execution & precise documentation of such, and are personally explained to
our clients by
our staff
· Lengthen the terms on ALL your
Installment and Mortgage Obligations.
· Select Revolving Account (Credit Cards)
which require the lowest minimum monthly payments (Usually a percentage of
the outstanding balance)
· Begin making auto loan payments from
your LLC Operating Account (We will provide further explanation of the tax
ramifications)
· Lease your primary residence from your
LLC at a hugely discounted rental rate (We will provide further explanation
of the tax ramifications)
· Do not fall behind on your monthly tax
and/or child support obligations as they may find their way to your pay
stubs as deductions, or worse, to your credit report as a judgment or lien.
· Religiously
pay
any installment or revolving account used by your Real Estate Investment
Business through your LLC Operating Account.
· TAXES: Contrary to any potential
ill-advice from your tax advisor; do not be penny smart and dollar foolish
and shelter all of your Real Estate Investment earnings. You must show an
average -24-month profit adequate enough to maintain an acceptable
debt-to-income ratio for your current expenses and projected acquisitions in
the next two proceeding tax-years.
All too often we
see clients
utilizing extremely creative accounting measures to avoid taxes. In the
end, the $5,000 one saved in taxes resulted in several tens of thousands (If
not hundreds of thousands) of dollars in loss of potential profit. As much
as we all hate paying taxes, paying taxes means you are generating profit.
As they say; "That's a good problem to have". Deduct your legitimate
business expenses, however, your CPA or Tax Advisor must keep a very close
eye on your total overall personal & business debt and income load when
analyzing your deductions, making certain you show enough profit to insure
"Lending Continuity"
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Avoid financing vehicles and other
goods for anyone, unless you are absolutely certain the individual will make
timely payments and can document the payments of such in a very precise
manner. Unless you can document an individual other than yourself is making
payments for a minimum of 3-6 months, those very same payments will be
counted against your DTR (Debt to Income Ratios). Should that individual
make a late payment, the lending industry will NOT provide leniency to the
late history nor the reduction in credit score (Contrary to uneducated
beliefs). How to properly document payments by another entity/individual:
- Provide a minimum of 3-6 months
canceled checks which clearly illustrate the payee, account number and
payment amount. There should be consistency in all three.
- If canceled checks are not available,
provide bank statements illustrating the check number and amount or ACH/EFT
payment to the creditor on a monthly basis.
- Last form of documentation may come
from copies of cashiers checks or money order.
Both
should state very clearly the date, the payee, the payor, account number and
of course the amount paid.
There are NO OTHER SUBSTITUTIONS.
Affidavits, letters and receipts are as worthless as the paper they are
written on. A receipt may only be accepted if generated on a
“known creditor’s” letter head, specifies the payer, account
number, date of payment and the amount paid. It is very unlikely a finance
company will provide such verification. Make certain there are absolutely
no GAPS in payments!
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Qualifying Ratios |
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100% Lending: |
45% Top Tier |
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50% Second Tier |
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100% HELOCS |
45% Top Tier |
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50% Second Tier |
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Traditional Financing
* Requires 10 - 20%
down payment |
40-60% depending on
the strength of the borrower, property, reserves and other
compensating factors. General guidelines call for 38-40%. |
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Debt to income ratio is calculated by dividing
the
total
current housing expense (PITI), proposed transaction expense (PITI)
and total consumer monthly debt load by
the
total gross monthly income (Earned income, fixed income, current
rental income and proposed rental income of the property being
purchased). While this is the general calculation, there are “Certain
Tactics” our 17+ years in the lending business can utilize
to generate a more appealing appearance in
DTR.
Just
one of the many advantages by working with a Highly Experienced
"One-on-One" staff of Mortgage &
Financial Investment
Planning Professionals.
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