Credit Scores

Debt To Income Ratio And Credit Scores

Gustan Cho Associates

A person’s credit score will determine whether or not the person can qualify for a certain mortgage loan program.  For example, the minimum credit score needed to qualify for a conventional loan is 620 FICO.  The minimum credit score to qualify for a FHA loan is 500 FICO.  However, home buyers who have credit scores between 500 FICO and 579 FICO, FHA requires that the home buyer put at least a 10% down payment on their home purchase.  FHA minimum down payment requirements is 3.5% down payment for a home purchase.  To qualify for a 3.5% down payment home purchase mortgage loan, the home buyer will need a minimum of a 580 FICO credit score.

Debt To Income Ratio

Besides credit scores, the debt to income ratio is the next most important factor that comes into play in qualifying a mortgage loan applicant.  There are two different types of debt to income ratios.  The front end debt to income ratios and the back end debt to income ratios.  The front end debt to income ratio is also known as the housing ratio.  The housing ratio, or front end debt to income ratio, is the monthly principal, interest, taxes, and insurance divided by the borrower’s monthly gross income.  For example, if the principal, interest, taxes, and insurance on a home purchase is $1,000 per month and the mortgage loan applicant makes $4,000 per month, the front end debt to income ratio is $1,000 divided by the borrower’s gross monthly salary of $4,000 per month which will yield 25% front end debt to income ratio.  The back end debt to income ratio is calculated by adding the proposed housing payment ( PITI ) plus the borrowers all other monthly minimum payments which include minimum credit card payments, auto loan payments, student loan payments, child support payments if applicable, alimony payments if applicable, installment payments, and other minimum payments and dividing it by the mortgage loan borrower’s gross monthly income.  If the mortgage loan applicant has a proposed $1,000 housing payment and the sum of all of the minimum monthly payments total an additional $1,000 for a total sum of $2,000 in monthly payments per month and the gross monthly income is $4,000 per month, dividing the $2,000 in monthly minimum payments by the mortgage loan applicant’s gross monthly wages of $4,000 will yield a back end debt to income ratio of 50%.

How Credit Scores Impact Borrower’s Debt To Income Ratio Caps

A mortgage loan applicant’s credit scores does affect the debt to income ratios allowed in mortgage qualification.  The maximum front end debt to income ratios allowed per FHA lending guidelines is 46.9%.  The maximum back end debt to income ratios allowed under current FHA lending guidelines is 56.9%.  The 46.9% front end maximum debt to income ratios and 56.9% back end debt to income ratio caps are only available to mortgage loan applicants with credit scores of at least 620 FICO or higher.  If a mortgage loan applicant has credit scores lower than 620 FICO, the maximum front end debt to income ratios allowed per FHA mortgage lending guidelines is 31% and the maximum back end debt to income ratios allowed is 43%.  There are no exceptions to the above credit scores versus debt to income ratio requirements.

Mortgage Lender Overlays On Debt To Income Ratios

There are many mortgage lenders who implement their own debt to income ratio requirements above the FHA maximum lending debt to income ratio requirement.  For example, a mortgage applicant with credit scores above the 620 FICO is technically qualified for a 46.9% front end debt to income ratio and 56.9% back end debt to income ratio FHA insured mortgage loan.  However, a particular mortgage lender may impose their own requirements, called mortgage lender overlays, where they will cap the debt to income ratios at 50%.  Other FHA mortgage lenders will set their own credit score minimums such as that a mortgage loan applicant will qualify for a 45% debt to income ratio FHA loan if their credit scores are below 680 FICO and over 680 FICO, they will go up to 56.9% back end debt to income ratios.  Yet there are other mortgage lenders, such as myself, where we have no mortgage lender overlays and just go off the federal minimum FHA mortgage lending guidelines.  As long as it is approved/eligible per DU FINDINGS, we just go off the DU FINDINGS or LP FINDINGS ( LP FINDINGS ARE FREDDIE MAC’S VERSION OF THE AUTOMATED UNDERWRITING SYSTEM ).

Credit Scores And Debt To Income Ratio Caps On Conventional Loans

Unlike FHA insured mortgage loans, the credit scores do not have any impact on the debt to income ratios on Conventional Loans.  With Conventional Loans, the maximum debt to income cap is at 45%.  With Conventional Loans, credit scores do have a huge impact on what the conventional mortgage loan borrower gets in mortgage rates.  The lower the credit score, the higher your interest rate on your mortgage loan will be.  To get the best available conventional loan interest rate, the conventional mortgage loan applicant should have a credit score of 740 FICO or higher.  With FHA insured mortgage loans, any FHA mortgage loan applicant with a credit score of 640 FICO will get the best available FHA interest rate.  FHA mortgage borrowers with credit scores of 600 FICO or lower will get higher mortgage rates. Although credit scores have a slight impact with FHA Loans, it is not as credit sensitive as Conventional Loans.

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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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