Debt To Income Ratio Limit To Qualify For Mortgage Loan

This BLOG On Debt To Income Ratio Limit To Qualify For Mortgage Loan Was UPDATED On July 31, 2017

Home Loans And Debt To Income Ratio Limit:

Every mortgage loan program has a Debt To Income Ratio Limit (DTI). Debt To Income Ratios is calculated by taking the sum of all minimum monthly debt payments that report on the credit report and dividing it by the borrower’s monthly gross income.

There are two types of debt to income ratios:

  1. Front End Debt To Income Ratio: This ratio is taking the proposed housing payment (PITI) and dividing it by the borrowers’s monthly gross income.
  2. Back End Debt To Income Ratio: The Back End Debt To Income Ratio is the sum of the proposed housing payment PLUS all other monthly debt payments and dividing it by the borrower’s gross income.

Debt To Income Ratio Limit On Conventional Loans

Fannie Mae has debt to income ratio limit capped at 45% on conventional loans to get an approve/eligible per Automated Underwriting System. Freddie Mac can go up to 50% DTI on conventional loans. There are no front end debt to income ratio requirements. Front End DTI Requirements on Conventional Loans is up to the individual lender as part of their lender overlays.

  • What this means is that the total monthly payments divided by total monthly gross income cannot exceed 45% with Fannie Mae and 50% with Freddie Mac.
  • If gross monthly income is $10,000, the total monthly payments cannot exceed $4,500 which includes proposed housing expenses ( principal, interest, taxes, insurance, homeowners association). 
  • However, Freddie Mac will extend the 45% debt to income ratio up to 49.9% with Freddie Mac. 

For those with high debt to income ratio who exceed conventional loan debt to income ratio limits, FHA loans might be an option. 

  • FHA loans have more lenient debt to income ratio requirements than any other mortgage loan program.
  • FHA allows back end debt to income ratio limit to be capped at 46.9% front end DTI and 56.9% back end DTI to get an approve/eligible per Automated Underwriting System..

FHA Loan Debt To Income Ratio Limit

FHA Debt To Income Ratio Limit depends on the borrower’s credit scores:

  • FHA’s maximum debt to income ratio is as high as 56.9% back end and 46.9% DTI front end to get an approve/eligible. 
  • However, if borrowers credit scores are lower than 620 FICO, FHA loan debt to income ratio limits debt to income ratio to 43% to get an approve/eligible per AUS. 
  • The Gustan Cho Team has no lender overlays so as long as front end DTI is 46.9% DTI and back end DTI is 56.9% with credit scores over 620 FICO. 
  • For those whose debt to income ratio is higher than 56.9%, FHA allows non-occupied co-borrowers. 
  • HUD, the parent of FHA, allows unlimited non-occupant co-borrowers to be added on a FHA Loan.
  • Adding non-occupant co-borrowers is one of the many advantages of FHA loan borrowers who exceed the 56.9% debt to income ratio.

VA Loans Debt To Income Ratio Limit

VA Loans do not have a maximum debt to income ratio limit. However, most lenders cap debt to income ratio limit on VA Loans between 45% to 50%.

  • This cap is not a VA Guidelines On DTI but rather a lender overlay on each individual VA Lender.
  • I have gotten VA borrowers approved with 580 credit scores and 60% debt to income ratio.
  • It all depends on the Automated Underwriting System.
  • The Gustan Cho Team has no lender overlays on VA Loans and will just go off AUS Findings.
  • If the findings render an approve/eligible with 60% DTI with under 600 credit scores and the veteran borrower can meet the conditions of the automated approval, we can go ahead with the VA Loan Process and close.

Jumbo Loans Debt To Income Ratio Limit

With jumbo loans, which are mortgage loans that exceed $417,000, the maximum debt to income ratio is normally set at 43%.

  • Most jumbo loan lenders are pretty set on their 43% debt to income ratio requirements and exceptions are normally not made in most circumstances.

Conventional Loan To FHA Loan

In some cases, conventional loan borrowers convert to FHA mortgage loan programs because they have high debt to income ratios.

  • One major disadvantage with FHA loans compared to conventional loans is that mortgage insurance premium is mandatory for the life of the loan. 
  • Due to new FHA regulations effective June 3, 2013, FHA mortgage insurance is mandatory no matter what the loan to value is on the subject property. 
  • Before the new FHA rule came into effect, FHA mortgage insurance premium was only required for a minimum for 5 years and was automatically cancelled once the loan to value of the home reached 78%. 
  • Now, FHA mortgage insurance premium is required as long as you have the FHA loan. 
  • The only way out of FHA Mortgage Insurance Premium is either to pay off the loan or refinance it to a 80% loan to value conventional mortgage loan.

How Deferred Student Loans And IBR Payments Affect DTI

Deferred Student Loans and student loan payments on IBR are no longer exempt with FHA Loans.

  • Most lenders will take 1.0% of the student loan balance and use it as a monthly debt payment.
  • This will often disqualify many home buyers.
  • Deferred Student Loans that are deferred for 12 or more months are exempt from DTI calculations only with VA Loans.
  • However, there is a solution.

Borrowers with high student loan balance that is deferred can contact the student loan provider and request the following:

  • Tell the student loan provider that they are applying for a mortgage
  • Request a fully amortized monthly payment over and extended payment plan which is normally 25 years
  • It normally turns out to be 0.50% of the student loan amount
  • Borrowers do not have to change the student loan terms and can just keep the student loan terms deferred or on an IBR payment plan
  • All that is required is a hypothetical written statement what if the deferred student loan were out of deferment 
  • Needs to be a written statement from the student loan provider
  • If the student provider gives a hard time, please contact us and we can do a three way conference call with the student loan provider and ask for a supervisor

Home Buyers who have higher debt to income ratio and need to qualify for a mortgage with a lender with no lender overlays, please contact us at 1-800-900-8569 or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

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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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