What is your take on deducting the expenses noted on the Schedule A like charitable donations, job related expenses, and medical expenses from the net cash flow? I know every bank looks at things a bit different.
You are right, banks look at this differently. Here is my take.
Let’s say you use a debt-to-income ratio for personal lending or guarantor analysis of 40%. That means the other 60% is left over for family living expenses, paying taxes and savings.
Many would say that charitable contributions and medical expenses are part of family living expenses. And in the case of charitable contributions, are optional. I would tend to agree with them.
If either of them are highly unusual in amount it might get my attention. For example, if medical expenses all the sudden went WAY up, is there a catastrophic illness in the family? Even if there is, can we really count that against them? I must admit that if it is the business owner who is fighting the health challenge I might like to know if I was the business lender.
As to job related expenses, I would count those against them only if they are recurring and are not optional. If a teacher chooses to spend extra one year but does not have to do so, I am not inclined to treat it as if it will happen every year.
All of that said…you are right to check your guidelines. Some of my clients do not use a debt-to-income ratio and instead go for a global cashflow (owner and business combined) with a debt-coverage-ratio. In that case, they often subtract family living expenses. Sometimes that is a set amount, sometimes it is a set amount plus $XXX for each dependent, and sometimes they look at Schedule A expenses to see where they should be in a range of options. In that case, if they would look at charitable contributions the same for every borrower, I would not be as concerned.