Debt To Income Ratio Concerns For First Time Home Buyers
First time home buyers need to get a pre-approval letter from a mortgage lender in order for them to shop for homes. A pre-approval letter is issued by a mortgage lender once the lender gathers income information and analyzes liabilities of the borrower. Liabilities are credit obligations the mortgage loan borrower has such as minimum credit card payments, auto loans, student loans, and other installment and revolving credit obligations. The mortgage loan borrower’s credit, credit scores, credit history, and credit report is also analyzed. One of the major factors that is taken into consideration in issuing a pre-approval is the mortgage loan borrower’s debt to income ratio. If the mortgage loan borrower meets the debt to income ratio parameters, a pre-approval is issued. However, if a mortgage loan borrower barely meets the debt to income ratio requirements, there can be risks associated with the final approval of the mortgage loan application.
What Is Debt To Income Ratio?
Debt to income ratio is the sum of the total amount of minimum monthly payment obligations divided by the borrower’s gross monthly income. There are two types of debt to income ratio. The front end debt to income ratio is the total housing expense which includes the principal, interest, homeowners insurance, mortgage insurance premium, and homeowners insurance dues divided by the borrower’s gross monthly income. The back end debt to income ratio is the sum of the housing expenses plus all other minimum monthly credit obligations such as minimum credit card payments, auto loan, student loans, alimony, child support payments, and any other monthly minimum payments divided by the borrower’s gross monthly income.
Borrowers With Under 620 FICO Credit Scores
For mortgage loan borrowers with credit scores of 620 FICO or higher, the front end debt to income ratio caps are at 46.9% to get an approve eligible per DU FINDINGS . The maximium back end debt to income ratio caps are capped at 56.9%. For mortgage loan borrowers where their credit scores are below 620 FICO or their files need to be manually underwritten, the front end debt to ratio cap is set at 31% and the back end debt to ratio caps are at 43%. These lower debt to ratio caps on manual underwrites can be higher if there are compensating factors. Compensating factors are postive items such as reserves, larger down payment, and rental verification.
Risks For First Time Home Buyers With High DTI
A pre-approval is not a guarantee that a first time home buyer will get their mortgage loan to close. There are many risks for first time home buyers who have high debt to income ratios and just because a mortgage loan originator gives a first time home buyer a pre-approval, that does not mean that the deal is solid, especially for those first time home buyers or home buyers with higher debt to income ratios. A mortgage loan originator should explain the risks associated with those who have high debt to income ratios.
How Mortgage Loans Get Denied Due To Debt To Income Ratios
If you are a mortgage loan borrower with debt to income ratios of 46.9% front end, and 56.9% back end and barely gotten an approve/eligible per DU FINDINGS, you cannot have any extra monthly payments or else your debt to income ratio will surpass these mandatory maximum qualifying debt to income ratios. For example, if your homeowners insurance comes up more than expected or your property taxes are more than when the mortgage loan originator qualified you, this can be a dead deal. It is best to think ahead and get more of a cushion if you are a high debt to ratio mortgage loan borrower. There are creative ways of lowering debt to income ratios. We will write more about debt to income ratio issues in future articles.
By Gustan Cho