Debt To Income Ratios: DTI Caps

A mortgage loan borrower can lower his mortgage rates by paying points.  Buying down mortgage rates by paying points is a strategy often use for mortgage loan borrowers who have high debt to income ratios.  The maximum front end debt to income ratio cap for FHA insured mortgage loans is 46.9%.  The maximum back end debt to income ratios for FHA insured mortgage loans is 56.9%.

Debt To Income Ratios

Debt to income ratios are the total monthly payments a mortgage loan borrower has divided by their gross monthly income.  The front debt to income ratios are the total housing expenses divided by the gross monthly income.  Housing expenses is the principal, interest, taxes, mortgage insurance premium, homeowners insurance, and homeowners associations dues if applicable.  The back end debt to income ratios are the sum of the total housing expenses plus any other monthly minimum payments such as auto loans, minimum student loan payments, minimum credit card payments, and other installment minimium payments divided by the gross monthly income.

Buying Down Mortgage Rates: Paying Points

If your debt to income ratios are higher than the maximum allowed, there are several options for you to still get a residential mortgage loan approval.  The first option is to pay down all your credit cards so you have no minimum credit card payments.  If your debt to income ratios still exceed the maximum allowed, then buying down mortgage rates by paying points is a great option.  Buying down mortgage rates is expensive.  For example, current FHA insured mortgage rates are at 4.25%.

Options In Getting Lower Mortgage Rates

If you want a mortgage rate of 3.5%, you can get this rate buy buying down mortgage rates by paying 3 points.  3 points on a $200,000 mortgage loan is $6,000.  It is a one time fee to buy down the rate but many mortgage loan borrowers need to do it in order to get the lower rate in order to lower their monthly mortgage payments in order to qualify for a mortgage loan so it does not exceed the maximum debt to income ratio caps mandated by FHA mortgage lending guidelines.

Alternative To Buying Down Mortgage Rates To Get Lower Rates

An alternative to buying down mortgage rates to get lower interest rates so the mortgage loan borrower’s monthly mortgage payments are reduced to qualify for debt to income ratio requirements is choosing a FHA adjustable mortgage rate mortgage loan program.  ARM’s have lower mortgage rates than 30 year fixed rate mortgage loans.  There are 3/1 ARM, 5/1 ARM, and 7/1 ARM mortgage loan products.  Adjustable rate mortgages have much lower mortgage rates than 30 year fixed rate mortgage loans.

Get 6% Sellers Concession To Buying Down Mortgage Rates

You are allowed to use sellers concessions to buying down mortgage rates.  The Federal Housing Administration allows up to a 6% sellers concession from the seller towards a buyer’s closing costs.  Buying down mortgage rates requires the buyer to pay points.  Points are part of closing costs so sellers concessions can be used towards paying points in buyng down mortgage rates.

By Gustan Cho

www.gustancho.com

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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