Debt To Income Ratio Overlays Versus Agency Mortgage Guidelines

Gustan Cho Associates
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Debt To Income Ratio Overlays Versus Agency Mortgage Guidelines

This BLOG On Debt To Income Ratio Overlays Versus Agency Mortgage Guidelines Was PUBLISHED On July 11th, 2019

Debt To Income Ratio Overlays
Gustan Cho Associates

What Are Debt To Income Ratio Overlays?

Debt To Income Ratio Overlays is additional guidelines that an individual lender sets on top of the minimum lending requirements that are mandated by the particular mortgage loan program such as FHA, VA, USDA, Fannie Mae, and Freddie Mac.

  • For example, HUD requires the borrower can have a debt to income ratios up to 56.9% DTI
  • This holds true as long as they have credit scores higher than 620 FICO
  • However, many lenders may add stricter debt to income ratio overlays depending on the borrowers’ credit scores
  • Some mortgage companies will have a debt to income ratio overlays of 45% DTI
  • This holds true no matter what the borrower’s credit scores are
  • Some lenders may have a debt to income ratio overlays
  • They may require the borrower can have a maximum debt to income ratio requirement of 45% if their credit scores are below 640 credit scores
  • The lender may increase it to 50% debt to income ratio overlays on borrowers with credit scores of 640 FICO and higher
  • They may not accept the FHA debt to income ratio maximum of 56.9% DTI
  • I know of one lender that will have a debt to income ratio overlays that state Borrowers of credit scores under 680 FICO, the maximum debt to income ratios they can have is 45%
  • Any borrowers with credit scores of 680 FICO or higher, they can have a debt to income ratios of up to 55% DTI
  • Borrowers with high debt to income ratios need to research for a lender with no overlays
  • They need to take time in choosing the right mortgage lender where the lender has no debt to income ratio overlays like us at Gustan Cho Associates
  • Gustan Cho Associates at Loan Cabin Inc. does not have any debt to income ratio overlays on FHA Loans
  • We can go up to a 56.9% debt to income ratio with credit scores of at least 620 FICO credit scores
  • For FHA Borrowers With Under 620 FICO Credit Scoresthe maximum credit scores allowed for an approve/eligible automated underwriting system finding is 43% DTI

In this article, we will cover Debt To Income Ratio Overlays.

Debt To Income Ratio Overlays: How Do Underwriters Calculate DTI

Debt To Income Ratio Overlays: How Do Underwriters Calculate DTI

Debt To Income Ratios are the total monthly minimum payments a borrower has divided by the gross monthly income.

  • What is included in calculating debt to income ratios by mortgage underwriters ?
  • The amount of the balance does not matter
  • However, the minimum monthly payment does
  • Auto payments, student loan payments, minimum credit card payments, installment monthly payments, and the proposed principal, interest, taxes, insurance (P.I.T.I) are all included
  • If the proposed property that the home buyer is purchasing has homeowners association dues (HOA) then the HOA monthly fees are also included in the calculation of the borrower’s debt to income ratios
  • Other debts that are calculated by mortgage underwriters in calculations of the borrower’s debt to income ratios include the following:
    • child support payments
    • minimum payment agreements made with judgment creditors
    • the internal revenue service (IRS) if the borrower has a tax lien
    • alimony payment if applicable
    • other monthly minimum payments that the borrower has that reports on the borrower’s credit report

Expenses such as monthly medical insurance premiums, automobile insurance premiums, cell phone bills, telephone bills, cable bills, water bills, scavenger monthly services, water bills, electric bills, school tuition, and gas bills do not count and are not used as monthly expenses in the calculations of debt to income ratios by mortgage underwriters.

Debt To Income Ratio Overlays On Collection Accounts In DTI Calculations

Debt To Income Ratio Overlays On Collection Accounts In DTI Calculations

HUD does not require Borrowers to pay off outstanding collection accounts and/or charge off accounts to qualify for FHA Loans.

  • However, non-medical outstanding collection accounts will affect debt to income ratios
  • This only holds true if the total amount of non-medical outstanding collection accounts is equal to or greater than $2,000
  • This is because lenders will be required to take 5% of the unpaid outstanding collection account balance and add that as monthly debt to the borrower in the calculations of the borrower’s debt to income ratios
  • This holds true even though the Borrower does not have to pay any monthly payments
  • This rule only applies to non-medical outstanding collection accounts
  • It does not apply to outstanding medical collection accounts nor charged off accounts
  • No matter how much the medical collection account balance or charge off balance is, no portion of the outstanding unpaid collection account balance will be factored in to calculate the borrower’s debt to income ratios

Again, any outstanding non-medical collection accounts for less than $2,000 balance will not be factored in the calculations of debt to income ratios.

Debt To Income Ratio Overlays: Mortgage Lenders Requiring Collection Accounts To Be Paid Off

Debt To Income Ratio Overlays: Mortgage Lenders Requiring Collection Accounts To Be Paid Off

Unfortunately, there are many lenders that will require that outstanding collection accounts and charge off accounts to be paid off before they will approve:

  • They will also require pay outstanding collections/charged off accounts to be paid to close on a mortgage loan with their institution as part of their overlays
  • These are not HUD requirements but the mortgage lenders own requirements and are called FHA Overlays On Collection Accounts
  • However, as mentioned earlier, HUD does not require that outstanding collection accounts be paid off and Borrowers do not have to pay off any outstanding collection accounts to qualify for an FHA Loan
  • However, due to the rule that 5% of the outstanding unpaid non-medical collection account balance needs to be calculated in the calculations of non-medical collection accounts in the calculation of the borrower’s debt to income ratios by underwriters
  • If the borrower has a large outstanding non-medical outstanding collection account balance and the 5% of the outstanding collection account balance will exceed the maximum debt to income ratio limits allowed, the borrower can set up a written payment agreement with the creditor and/or collection agency
  • Whatever the monthly written payment agreement is, that amount can be used in lieu of the 5% of the outstanding collection account balance
  • There are no seasoning requirements and the date the written payment agreement is executed is the date that this will go into effect

If you are in search of a lender who has no debt to income ratio overlays, contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays to take your calls and answer any questions you may have.

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