THE BARATELLI INSTITUTE · Mentoring at Scale
FOR HOMEBUYERS, REFINANCERS, INVESTORS, AND THE ADVISORS WHO GUIDE THEM

The mortgage underwriting math your loan officer is running. Run it before you submit.

Every residential mortgage decision turns on five numbers: front-end DTI, back-end DTI, LTV, FICO, and reserves. Add three more for self-employed and investment buyers: 2-year average AGI, DSCR, and 75% rental income credit. This tool runs all of them — and tells you which loan product matches your file before you spend $1,000 on appraisal and credit pulls.

28/36
Conforming DTI
43%
QM ceiling
$806K
2025 conforming limit
2-yr
SE income avg
YOUR FILE
1
The property
2
Income
3
Debts & assets
4
Loan structure
5
Underwriting verdict
STAGE 1 OF 5

The property

Defaults model a $750,000 primary residence purchase with 20% down — typical move-up buyer in a high-cost MSA.

Drives the underwriting standard. Primary residence is the friendliest. Second home requires more reserves and slightly tighter DTI. Investment property requires DSCR underwriting and the 75% rental income credit.
Single-family is most lender-friendly. Condos require HOA review (warrantable vs. non-warrantable). 2-4 unit "small multi-family" gets investment-property treatment but you can occupy one unit and use FHA. Manufactured/mobile is restrictive.
Determines LTV. For purchase: contract price. For refinance: appraised value (often less than what owner thinks).
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20% avoids PMI on conventional. 10% requires PMI but no jumbo trigger if loan stays below conforming limit. 5% is minimum conventional with PMI. 3.5% is FHA minimum. 0% is VA/USDA only. For investment property, minimum is typically 25%.
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Used in PITI calculation (Principal + Interest + Taxes + Insurance) for DTI. Most lenders require escrow account that collects 1/12 monthly.
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Insurance + HOA dues count toward PITIA (the A is for HOA). High-rise condos in high-cost MSAs can have HOA dues of $1,000-2,000/month — major DTI impact.
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The conforming-limit cliff. The 2025 baseline conforming loan limit is $806,500 for one-unit properties (higher in high-cost areas, up to $1,209,750 in Hawaii, Alaska, and certain MSAs). One dollar above the limit and you're in jumbo territory — different lender, different underwriting (often tighter, sometimes looser depending on lender), and typically 25-50 bps higher rate. Putting more cash down to land below the limit can save $50-150K in interest over the loan life.
STAGE 2 OF 5

Income

Self-employed underwriting is fundamentally different from W-2. Banks use 2-year average AGI from tax returns (Schedule C net or K-1) and require declining-trend analysis if Y2 less than Y1. Most rejections of self-employed files are about how income gets calculated, not about whether the borrower has the money.

W-2 = bank uses gross monthly wages from current paystub. Self-employed = bank averages 2 years of tax-return AGI/net profit. Recently changed jobs (less than 2 years) = restrictive. 1099 contractor = treated as self-employed.
For W-2: gross annual wages (verified by paystubs + W-2). For self-employed: 2-year average of net profit (Schedule C line 31) or K-1 ordinary income, with depreciation typically added back. For retired: pension + Social Security + verifiable IRA distributions.
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Spouse or co-applicant. Must be on title and on the loan. Combined income is what underwriting evaluates.
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For investment property loans: lender credits 75% of expected market rent toward income (the 25% haircut covers vacancy and management). Get a Schedule E from the seller or a 1007 rent comparable from the appraiser.
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If Y2 income is less than Y1 by more than 10%, lender uses Y2 (lower) instead of average. If down 25%+, may decline. If income is dramatically increasing, lender may average up to current run-rate but still cautiously.
Banks add back depreciation from Schedule E rentals and Schedule C businesses (it's a non-cash deduction). Check your tax returns — easy to miss this and underqualify yourself by $10-30K/year.
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The self-employed paradox. The same person who owns a $5M business may not qualify for a $750K mortgage because their tax-return AGI is intentionally minimized through legal deductions (depreciation, retirement contributions, business expenses). The fix isn't to overpay tax — it's to (a) use a "bank statement loan" (no tax returns, 12-24 month bank deposits used instead, 100-150 bps higher rate, 10-20% down), (b) use a "P&L loan" (CPA-prepared P&L), or (c) plan ahead 2 years and reduce deductions before applying.
STAGE 3 OF 5

Debts & assets

Underwriting computes back-end DTI as (PITI + all monthly debt) ÷ gross monthly income. The "all monthly debt" includes minimums on credit cards, student loans, auto loans, and any other amortizing debt — even if you pay them off monthly.

Lenders pull a credit report and use minimum monthly payments — even if you pay credit cards in full each month, the minimum still counts toward DTI. Includes: card minimums, student loan IBR or amortizing payment, auto loans, personal loans, child support / alimony if obligated.
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Lender uses lower of three credit bureaus' middle scores (or lower of two borrowers' middle scores if joint). 740+ best pricing. 720-739 ~12.5 bps higher. 700-719 ~25 bps. Below 660 conventional becomes hard. Below 580 typically only FHA.
After down payment and closing costs, what's left in cash and liquid savings. Conventional needs 2 months PITI in reserves; investment property needs 6+ months; jumbo can require 12+ months. Reserves dramatically improve underwriting flexibility on marginal files.
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401(k), IRA, brokerage accounts. Lenders typically credit 60-70% of vested retirement balance toward reserve requirement (the haircut covers withdrawal tax + market risk). Can save a marginal file.
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The student-loan trap. Income-based-repayment (IBR) student loans appear on credit reports as small monthly payments — but Fannie/Freddie underwriting may use 1% of the loan balance regardless of actual payment, even if you're in $0/mo IBR. So a $200K student loan in IBR with $0 actual payment can hit DTI as if you had a $2,000/month payment. Different lenders interpret this differently — some use actual statement payment, some use 1% balance, some use IBR amount. Ask before submitting.
STAGE 4 OF 5

Loan structure

Loan term, interest rate, and product type. The right product depends on income type, time horizon, and rate environment.

Conventional = Fannie/Freddie. FHA = government-insured, low down, mortgage insurance for life of loan. VA = veterans, no down payment, no PMI. Jumbo = above conforming limits, often portfolio-held, custom underwriting. Doctor/professional = jumbo with relaxed DTI for licensed MDs/DDSs/JDs.
30-year is the default. 15-year saves 30-40% of total interest but doubles the monthly payment. 7/1 or 10/1 ARMs offer lower initial rate (50-100 bps below 30-yr fixed) — good if you'll move within 7-10 years.
Current 30-year fixed conventional ~6.50-7.25% as of mid-2026. Jumbo ~25 bps below conventional in current market (jumbo lenders aggressive for affluent borrowers). FHA / VA ~25 bps below conventional. ARM ~50-100 bps below 30-yr.
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Each "point" = 1% of loan amount, paid at close in exchange for a typically 25 bp lower rate. Worth it if you'll hold the mortgage 5+ years. Tax-deductible the year paid for purchase loans (not refis).
pts
STAGE 5 OF 5 · UNDERWRITING VERDICT

Mortgage underwriting verdict

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Front-end DTI (PITIA)
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Back-end DTI (all debt)
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LTV
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Monthly PITIA

Eight-test underwriting scoreboard

Most files miss on one of these. Here is your scoreboard.

Test
Threshold
Actual
Result

Loan economics

Special programs to consider

Recommendations

PAIRS WITH
FO Reference Guide · Liquidity Event Playbook · Quarterly Estimated Tax
Post-liquidity-event borrowers face a unique mortgage problem: 7-figure brokerage balances but minimal "income" by tax-return standards. The FO Reference Guide chapter on post-liquidity housing covers the asset-based-loan workaround and the strategic decision to keep cash deployed in markets vs. paying down a low-rate mortgage. Subscribe to the library →
FO REFERENCE GUIDE

Mortgage decisions are tax decisions, asset-allocation decisions, and timing decisions all at once.

Buy vs. rent break-even · 15-vs-30 year decision · ARM-vs-fixed in different rate environments · post-liquidity asset-based loans · refi-vs-stay decisions · cash-out refi for tax-aware investment · the tax mechanics of mortgage interest deduction.

Mortgage underwriting standards reflect typical conventional and government-program guidelines as of mid-2026. Specific lenders vary materially in overlay practice (additional restrictions above agency minimums) and in special-program availability (doctor loans, bank-statement loans, DSCR loans are non-agency products with widely varying terms). The model uses standard PITIA construction and conforming/jumbo conventions but does not model: condo project warrantability review, manufactured-home restrictions, USDA rural eligibility, VA funding fee waivers, foreign national or ITIN borrower programs, or non-warrantable condo programs. Self-employed underwriting in particular is highly sensitive to specific tax-return line items and bank discretion. Engage a mortgage broker (not just one bank's loan officer) for any actual transaction. This is not lending advice.
WANT THE METHODOLOGY BEHIND THIS TOOL?
This calculator is one chapter of The Business Buyer's Guide.
The tool gives you the answer. The guide gives you the argument — the case law, the worked examples, the negotiation playbook, the cross-check tables, the exception cases. Read the chapter and you can defend your number to a board, a buyer, an examiner, or a counterparty.
The methodology behind this calculator is in Ch 7 (real-estate-backed) of the reference guide.
See the Guide → Browse all 22 guides
PROFESSIONAL DISCLAIMER · PLEASE READ

Educational and informational purposes only. This calculator and any output it produces are intended solely for general educational and decision-support purposes. They do not constitute investment, tax, legal, accounting, appraisal, lending, insurance, or any other professional advice, and they do not create a fiduciary, attorney-client, accountant-client, or advisor-client relationship of any kind.

Estimates based on your inputs. All results are estimates derived from the data and assumptions you provide. Tax law, accounting standards, regulations, market conditions, and the specific facts of your situation can materially change the answer. The Baratelli Institute, its affiliates, and any co-branding professional make no warranty of accuracy, completeness, currency, or fitness for any particular purpose, and disclaim all liability for decisions made in reliance on the output.

Consult your own qualified professionals. Before acting on anything calculated here, consult your own attorney, CPA, financial advisor, appraiser, lender, or other qualified professional licensed in your jurisdiction who has reviewed your specific facts and applicable current law. The Baratelli Institute is a publisher of practitioner reference material. It is not a registered investment adviser, broker-dealer, law firm, accounting firm, appraisal firm, or lender.

Co-branded versions: If a professional advisor's name and contact information appear on this tool, that advisor has elected to make the tool available to clients as a courtesy. Inclusion of an advisor's name does not constitute the advisor's endorsement of any specific result, nor does it transfer professional responsibility for the underlying methodology to that advisor. The disclaimer above applies regardless of co-branding.