This Article Is About Buying Down Mortgage Rates To Meet DTI Guidelines
Today’s mortgage rates are at historic lows. Many homeowners who refinance at these historic low rates do not plan on refinancing in the near future. Therefore, they will pay a premium to buy down mortgage rates even lower than what par rates are today. There are other reasons for buying down rates with paying discount points. One of the reasons is due to loan-level pricing adjustments. Borrowers with high debt to income ratio may need to buy down the rate in order to qualify due to the high debt to income ratio. In this article, we will discuss the reasons why borrowers buy down mortgage rates with discount points.
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Reasons To Buying Down Mortgage Rates
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There are multiple reasons why borrowers need to buy down mortgage rates. The primary reason is due to getting a lower rate. Buying down mortgage rates is a good idea if you plan on not refinancing for a while. Buying down rates is not recommended on a starter home a homeowner plans on upgrading in five years or sooner. Other reasons for buying down rates are for borrowers with lower credit scores. Government and conventional loans have a maximum rate cap. Lenders cannot charge beyond a certain rate. However, due to the loan level pricing adjustments, discount points are charged for lower credit score borrowers.
Debt To Income Ratio issues is one of the biggest problems mortgage borrowers encounter. Many with great credit and credit scores run into debt to income ratio issues. All mortgage programs have debt to income ratio requirements. However, each individual lender can have higher standards on debt to income ratios than those mandated by FHA, VA, USDA, Fannie Mae, Freddie Mac. The additional debt to income ratio guidelines required by individual lenders is called lender overlays.
Buying Down Mortgage Rates Solution To High Debt To Income Ratios
A mortgage loan borrower can lower his mortgage rates by paying points. Sellers’ concessions can be used to buy points in buying down mortgage rates. Buying down mortgage rates by paying points is a strategy often used for mortgage 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 ratio for FHA-insured mortgage loans is 56.9%.
Debt To Income Ratios
Debt to income ratios is the total monthly payments a mortgage loan borrower has divided by their gross monthly income. The front debt to income ratio is the total housing expenses divided by the gross monthly income.
Housing expenses are the following:
- interest, taxes
- mortgage insurance premium
- homeowners insurance
- homeowners associations dues if applicable
The back end debt to income ratios are the following:
- the sum of the total housing expenses
Plus any other monthly minimum payments such as the following:
- auto loans
- minimum student loan payments
- minimum credit card payments
- other installment minimum payments divided by the gross monthly income
Buying Down Mortgage Rates With Paying Points
If the debt to income ratios are higher than the maximum allowed, there are several options for borrowers to still get a residential mortgage loan approval. The first option is to pay down all credit cards so there are no minimum credit card payments. If borrower’s 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.
Options In Getting Lower Mortgage Rates
If you want a mortgage rate of 3.5%, you can get this rate by buying down mortgage rates by paying 3 points.
- For example, let’s take a case scenario
- Let’s say current FHA insured mortgage rates are at 4.25%
- 1 discount point is 1% of the loan balance
- 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 borrower’s monthly mortgage payments are reduced to qualify for debt to income ratio requirements is choosing an 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
- However, most lenders will not qualify at the current ARM mortgage rate but will add an additional 2% for qualifying purposes
Due to this, changing to an adjustable-rate mortgage at a lower rate will not help lower debt to income ratios.
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Get 6% Sellers Concession To Use To Buy Down Rates
Home Buyers are allowed to use sellers’ concessions to buy down mortgage rates.
- The Federal Housing Administration (FHA) allows up to a 6% sellers concession from the seller towards a buyer’s closing costs
- USDA allows 6% sellers concessions
- VA Loans allow 4% sellers concession
- Both Fannie Mae and Freddie Mac allow 3% sellers concessions on owner occupant properties and 2% on investment properties
- 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 buying down mortgage rates
Home Buyers who need to qualify for a mortgage with high debt to income ratios with a direct lender with no overlays can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at email@example.com. We are available 7 days a week, evenings, weekends, and holidays.
July 12, 2021 - 4 min read