DEBT TO INCOME RATIOS

Gustan Cho Associates

Debt To Income Ratios

Debt to income ratios is what determines whether or not you qualify for a mortgage loan.  Debt to income ratios is the sum of all of your monthly minimum payments, including your proposed principal, interest, taxes, and insurance ( PITI ) divided by your monthly gross income.  Debt to income ratios requirements are different for the various mortgage loan programs.  FHA has debt to income ratio caps at 56.9%, USDA loan programs have debt to income ratio caps at 41%, VA loans have debt to income ratios caps as well but is determined by automated findings, Jumbo mortgages have debt to income ratio caps of 40%, and portfolio lenders often have debt to income ratio caps of 40%.  Conventional loans normally have debt to income ratios capped at 45%.

Conventional Loans

Conventional loans are loans that meet Fannie Mae and/or Freddie Mac lending guidelines and are different than FHA loans.  Conventional loans have different mortgage lending guidelines, different credit score minimum requirements, and different debt to income ratio requirements than FHA loans.  The two most popular loan programs are FHA loans and Conventional loans so we will compare these two loan programs on this blog.

Requirements On Conventional Loans

Conventional minimum credit score requirement is 620 FICO whereas minimum credit score requirements for FHA loans is 580 FICO.  Conventional loans have different waiting period requirements after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale than FHA loans.  There is a 7 year waiting period after foreclosure to qualify for a conventional loan after the recorded date of a foreclosure.  There is a three year waiting period after foreclosure to qualify for a FHA loan.  There is a four year waiting period after a deed in lieu of foreclosure or short sale to qualify for a conventional loan.  There is a three year waiting period after a deed in lieu of foreclosure or short sale to qualify for a FHA loan.  There is a four year mandatory waiting period to qualify for a conventional loan after a discharge date of a bankruptcy whereas there is a two year mandatory period after a bankruptcy discharge date to qualify for a FHA loan.  Minimum down payment for a conventional loan is 3% down payment for a first time home buyer or home buyer who has not owned a home in the past three years and 5% down payment for seasoned home buyers.  FHA requires a minimum 3.5% down payment on a home purchase.

Debt To Income Ratios For Conventional Loans

Debt to income ratios for conventional loans is capped at 45%.  There are no front end debt to income ratios for conventional loans whereas for FHA loans, the maximum front end debt to income ratios is capped at 46.9% and the debt to income ratios on the back end is capped at 56.9%.  The front end debt to income ratios are often referred to housing ratios where the proposed principal, interest, taxes, and insurance divided by the borrowers monthly income.  The back end debt to income ratios are the sum of the PITI plus all monthly minimum payments divided by the borrower’s gross monthly income.

FHA Loans Versus Conventional Loans

FHA loans have much lenient mortgage lending guidelines than conventional loans.  Debt to income ratios FHA guidelines are much more generous than conventional loans.  FHA loans have much more lenient lending guidelines with regards to deferred student loans.  If your student loans have been deferred for at least six months, FHA exempts the student loan payments from your debt to income ratios calculations whereas conventional loans will take 2% of your student loan balance to calculate your debt to income ratios even though your student loans have been deferred for more than 12 months.  Waiting periods after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale is much shorter for FHA loans than Conventional Loans.  FHA loans also ignore unpaid collection accounts, especially medical collection accounts where borrowers with unpaid collection accounts can qualify for a mortgage.  FHA allows non-occupant co-borrowers to be added on the mortgage for those who cannot get income documentation and/or have no income.

Other Loan Programs

Every loan program have different debt to income ratio requirements.  FHA is far the most generous when it comes to maximum debt to income ratios at 56.9%.  USDA loans are capped with 41% DTI.  Jumbo mortgages are normally capped at 40% debt to income ratios.  Most portfolio lenders cap debt to income ratios at 40%, depending on the lender.

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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