Debt To Income Ratio In Mortgage Process
By Gustan Cho NMLS ID 873293
Debt to income ratio and credit is the two most important factors in the mortgage approval process. Debt to income ratio is calculated by adding the total minimum monthly payments and dividing it by the mortgage loan borrower’s monthly gross income. For example, lets take a case study on Mortgage Applicant A. Here are Mortgage Applicant A’s monthly minimum payments:
Capital One……………………………….Minimum monthly payment of $100.00 and credit balance of $2,000
USAA Credit Card………………………Minimum monthly payment of $50.00 and credit balance of $1,000
XYZ Auto Finance………………………Minimum monthly payment of $400.00 and balance of $10,000
Proposed mortgage payment which includes principal, interest, taxes, and insurance $1,500.00.
Total monthly minimum payments of $2050.00.
Total monthly gross income of $3,700.00.
Front End Debt To Income Ratio
The maximum FHA front end debt to income ratio ratio allowed is 46.9% and the maximum FHA back end debt to income ratio allowed is 56.9% in order to get an approve/eligible per DU FINDINGS, which is the Automated Underwriting System. The front end debt to income ratio is also known as the housing debt to income ratio which is the proposed housing payment of the principal, interest, taxes, and homeowners insurance divided by the mortgage loan borrower’s monthly gross income which on this case is $1,500.00 proposed housing payment divided by the mortgage loan borrower’s $3,700.00 monthly gross income which yields 41% front end debt to income ratio which is lower than the 46.9% maximum front end debt to income ratio. So on the front end debt to income ratio, the mortgage loan applicant qualifies.
Back End Debt To Income Ratio
The back end debt to income ratio is calculated by taking the sum of the proposed new housing payment, which on this case is $1,500.00, plus all other minimum monthly debt obligations which yield $2,050.00 and dividing it by the mortgage loan applicant’s monthly gross income, which is $3,700.00. Dividing $2,050.00 by $3,700.00 yields 55% back end debt to income ratios which is lower than the maximum 56.9% allowed by FHA mortgage lending guidelines to get an automated approval.
Mortgage Approval Process: Clear To Close
There are stages of the mortgage approval process that every mortgage loan applicant needs to go through. Once everything has cleared, the ultimate goal is to get a clear to close which is a clear to fund the mortgage loan and close on either the home purchase or the refinance mortgage loan. Prior to getting a clear to close, the mortgage loan underwriter will do a soft credit pull on every mortgage loan applicant. Whether the credit scores went up or dropped does not affect the mortgage approval, however, the mortgage loan underwriter is checking on whether or not the mortgage loan borrower has incurred more debt and whether the mortgage loan borrower’s debt to income ratios are still in line with the maximum allowed. If, on this example, the mortgage loan borrower has charged up credit cards and the monthly debt obligations exceed the maximum 56.9% cap allowed in order to get an approve/eligible per DU FINDINGS, the clear to close cannot be issued by the mortgage loan underwriter and the mortgage approval will be placed on a suspense status until the debt to income ratios fall in line below the 56.9% maximum allowed.
Solution When The Final Credit Pull Results In Exceeding The Maximum Debt To Income Ratios
Every mortgage lender have their own rules and regulations when incidents like these happen. Some stricter mortgage lenders have a policy of denying the mortgage application. Other mortgage lenders may require that the mortgage loan borrower pay off the credit card and close out the credit card account. Yet other more lenient mortgage lenders may just have the mortgage loan applicant just pay off the credit card balance or other debt obligations and have the mortgage loan processor do a credit supplement and show the proof of payment and issue the clear to close.
Do Not Incur New Debt During Mortgage Process
Just because a mortgage loan applicant has the required down payment and closing costs and have a mortgage loan approval does not guarantee that the mortgage loan will be issued and a clear to close will be issued. The mortgage loan applicant needs to make sure that they do not get new credit, incur debt, change jobs, purchase or trade in their automobile, or be late with any credit payments during the mortgage loan approval process. Any of the preceeding factors can be a reason for a mortgage loan denial. Charging up credit cards during the mortgage approval process can be detrimental to those mortgage loan borrowers with higher debt to income ratios. Many home buyers want to purchase new furniture and apply for new credit at furniture stores or charge up their credit cards. Unfortunately, incurring more debt will reflect an increase of monthly debt obligations and many times can turn into a mortgage loan denial. Home buyers with higher debt to income ratios need to wait until they close on their mortgage loan to purchase new furniture, lawn equipment, or appliances. Your can bet that a final soft credit pull will be done by the mortgage loan underwriting prior to the issuance of a clear to close.