Debt To Income Ratio: Front End And Back End DTI
By Gustan Cho
Debt to income ratio is the sum of the monthly minimum payments a mortgage loan borrower has divided by the monthly gross income gross income. There are two types of debt to income ratios. The front end debt to income ratio and the back end debt to income ratio. The front end debt to income ratio is also called the housing debt to income ratio and is the principal, interest, taxes, and insurance plus any other housing expenses such as homeowners association dues and flood insurance if it is required divided by the mortgage loan borrower’s monthly gross income. The back end debt to income ratio is the housing expenses plus any other monthly expenses the mortgage loan borrower has divided by the borrower’s gross monthly income.
The maximum front end debt to income ratio allowed by HUD is 46.9%. The maximum back end debt to income ratio allowed is 56.9%. A mortgage loan applicant needs to meet the above debt to income ratio requirements in order for their mortgage loan approval to be valid and to be able to close the mortgage loan.
Front End Debt To Income Ratio
The front end debt to income ratio cannot exceed 46.9%, even though the mortgage loan borrower may not have any other monthly minimum payments. For example, if the mortgage loan borrower has no other expenses except for the proposed housing payment but the debt to income ratio exceeds 46.9%, the mortgage loan borrower will not be able to qualify for the mortgage loan. If the housing payment is $1,000 and the mortgage loan borrower’s income is $2,000 and the mortgage loan borrower has no other monthly minimum debt payments, the mortgage loan borrower’s front and back end debt to income ratios are at 50%. Even though the back end debt to income ratio is below 56.9%, the mortgage loan borrower will not be eligible for a mortgage loan due to the fact that the front debt to income ratio exceeds the maximum front end debt to income ratio of 46.9% allowed under HUD mortgage lending guidelines.
Solutions To High Front End Debt To Income Ratios
If you have front end debt to income ratios of higher than the 46.9% allowed, there are possible solutions that may resolve the problem. You can buy the rate down by paying points. Lower rates leads to lower housing payments. Another solution is to see if you can change the loan program to a 5 year adjustable rate mortgage loan. Adjustable rate mortgages often have much lower interest rates than 30 year fixed rate mortgages. Other solutions may be to shop for homeowners insurance where you can get a substantial lower insurance premium or change your homeowners policy where you get the bare minimum required by your mortgage lender to lower your homeowners insurance premium. If you have no other debts besides your proposed housing payment and higher credit scores, you may see if you can qualify for a conventional mortgage loan versus a FHA loan due to the fact that FHA has a very steep annual mortgage insurance premium. Conventional loan programs require a minimum of 5% down payment on a home purchase versus FHA’s 3.5% minimum down payment requirement but the private mortgage insurance on a conventional loan is over half less than FHA mortgage insurance premium. There are lender paid mortgage insurance conventional loan programs, called LPMI, where there is no private mortgage insurance required on conventional loans.
If you have explored all solutions to lower your front end debt to income ratios and cannot find a solution, then your last resort would be to get a non-occupant co-borrower who is a family member and/or relative to boost your income in order to lower your high front debt to income ratios. FHA allows non-occupant co-borrowers to be added to a home loan as long as the non-occupant co-borrower is a family member or relative related to the borrower by law, marriage, or blood.
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