Debt To Income Ratio

Debt to income ratio is a determinant in your mortgage qualification and mortgage approval process.  Mortgage lenders put a lot of weight in debt to income ratio.  You can have excellent income and perfect credit but if you have high debt to income ratio where it exceeds the maximum debt to income ratio requirements by Fannie Mae, Freddie Mac, FHA, USDA, VA guidelines, then your mortgage loan application will not qualify and will not close.  Before a mortgage application gets submitted to the underwriting department, the mortgage loan originator and processor should make sure that the mortgage loan borrower’s debt to income ratio is in line within the required debt to income ratio parameters.

What Is Debt To Income Ratio?

There is two types of debt to income ratios when it comes to the mortgage application process.  The front end debt to income ratio is the principal, interest, taxes, and insurance of the subject property divided by the borrower’s gross monthly income.  The back end debt to income ratio is the sum of the principal, interest, taxes, and insurance, as well as all other monthly minimum debt payments of the the mortgage loan borrower such as minimum credit card payments, auto loans, student loans, child support payments, alimony payments, and all other monthly minimum credit obligations divided by the borrower’s monthly gross income.  Conventional loans normally have debt to income caps at 31% front end and 43% back end debt to income ratio caps.  FHA loans front end debt to income ratio caps is set at 46.9% debt to income ratio and 56.9% back end debt to income ratio.  VA loans does not require a front end debt to income ratio and the back end debt to ratio max can be capped at 60% debt to income ratio.  Condotel mortgage loans and non-warrantable condo loan portfolio loans have debt to income ratio caps at 40% back end debt to income ratio caps.

Solutions To High DTI

The DTI we discussed in the earlier paragraph is the maximum DTI allowed per federal mortgage lending guidelines.  Each individual mortgage lender can have their own mortgage lender overlays where the DTI can be greatly reduced to lower limits making those mortgage loan borrower’s with high DTIs making more difficult to qualify for a mortgage loan.  There are solutions in solving high debt to income ratios.  Here are some of the solutions to solving high DTI problems.

1.  If you are seeking a conventional mortgage loan and do not qualify for a conventional loan due to have a 50% or higher DTI, you can convert that conventional loan application to FHA.  FHA caps on DTI is maxed out at 56.9% back end.  Also, if you have deferred student loans, conventional loan programs count deferred student loans in calculating debt to income ratios.  If your student loan is deferred for 12 or more months, FHA will let you exclude your student loans from DTI calculations.  For conventional loan programs, if you do not have a projected minimum monthly student loan payment, they will take 2% of the balance of your student loan and count that towards your DTI even though your student loan has been deferred for more than 12 months.

2.  Paying down all of your credit cards can have a significant positive impact on your DTI.  Many times, your high DTI problems are solved by paying off your credit cards.

3.  Car payments, student loan payments, and mortgage loan payments where someone else pays:  If you have credit items on your name such as car payments, student loan payments, mortgage payments, and other credit items and you can prove that someone else is paying for it, you can exclude those items from the DTI calculations.  For example, if you have student loan payments and your parents are paying for them and can provide 12 months cancelled checks from your payments, those payments can be excluded from your DTI calculations.  Same with car payments.  For example, if you are a co-signer for your son or daughter’s car loan and your son or daughter can provide you with 12 months cancelled checks that he or she has been paying on the car loan, that car payment can be excluded from your DTI qualifications.  A car payment is huge and often times, due to car payments, mortgage loan borrowers have outrageous debt to income ratios.  An average car payment is $400.00 which is equivalent to a $100,000 mortgage loan.  The reason car payments have so much impact on debt to income ratios is because the term of the car payment note is only 3 to 5 years whereas mortgages are amortized over 30 years.  If you are intending on purchasing a home in the near future and need a new car, I would strongly advise you to delay your car purchase until you have closed on your new home.

4.  Non-occupant co-borrower:  FHA loan programs allow for the home mortgage loan borrower to add a non-occupant co-borrower to qualify for DTI qualifications.  Conventional loans and other loan programs do not allow for non-occupant co-borrowers.  Non-occupant co-borrowers need to be family members or those that are related to the borrower by blood, law, or marriage. 

5.  Buying down mortgage rates:   Another option to solve high debt to income ratios is by buying down mortgage rates.  There are cases where I had to buy down the current mortgage rate of 4.25% to a 3.5% mortgage rate in order to qualify a mortgage loan borrower.  Buying down rates this much can be very costly.  If you are intending on buying down mortgage rates to this extreme, get the maximum sellers concession towards a buyers closing costs.  You can use sellers concessions towards buying down mortgage rates. 

6.  Choose ARM versus fixed rate for rate reduction:  Another solution in solving high debt to income ratios is to choose an adjustable rate mortgage, ARM, loan product.  ARM’s have normally lower mortgage rates than 30 year fixed rate mortgage products.

7.  Get car loan out of your name:  As mentioned earlier, a car payment can be a deal breaker because most car payments are $400.00 and this can send the DTI through the roof.  See if you can either pay off the car loan, refinance the car loan, trade in your car for a new car and extend the car payment loan for a longer term where your monthly car payment loan gets reduced, or get the car payment refinanced under some else’s name like your wife or family member.

Caution To Those With High Debt To Income Ratios

Just because you barely qualify for a mortgage loan with high to income ratios does not mean that you are home free.  You are home free as long as there are no added expenses and your DTI will remain the same until your mortgage loan closes.  Any additional expense on your monthly debt obligations can be a deal breaker.  For example, if your debt to income ratio is at 56.9% and you have an approve eligible per DU FINDINGS, even an additional $10.00 monthly payment can be a cause of a mortgage loan denial.  Typical cases where case scenarios like these become problems is when the homeowners insurance was quoted at one price and then prior to closing, the homeowner insurance comes out to be higher.  A higher than expected cost can be a major risk factor in those mortgage loan borrowers with high debt to income ratios.

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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