Debt To Income Ratio Overlays

What Are Debt To Income Ratio Overlays?

Debt To Income Ratio Overlays are mortgage lender overlays that an individual mortgage lender sets on top of the minimum mortgage lending requirements that is mandated by the particular mortgage loan program such as FHA, VA, USDA, Fannie Mae, and Freddie Mac. For example, FHA requires that a FHA mortgage borrower can have debt to income ratios up to 56.9% DTI 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 debt to income ratio overlays of 45% DTI no matter what the FHA mortgage borrower’s credit scores are. Some mortgage lenders may have debt to income ratio overlays where it states that the FHA borrower will have a maximum debt to income ratio requirement of 45% if their credit scores are below 640 FICO credit scores and 50% debt to income ratio overlays on borrowers with credit scores of 640 FICO and higher and will not accept the FHA debt to income ratio maximum 56.9% DTI. I know of one mortgage lender that will have debt to income ratio overlays that state that any FHA Borrowers of credit scores under 680 FICO, the maximum debt to income ratios they can have is 45% and any borrowers with credit scores of 680 FICO or higher, they can have debt to income ratios of up to 55% DTI.  FHA Borrowers with high debt to income ratios need to research and take time in choosing the right mortgage lender  where that mortgage lender has no debt to income ratio overlays like myself. I do not have any debt to income ratio overlays on FHA Loans and can go up to a 56.9% debt to income ratio on FHA Borrowers with credit scores of at least 620 FICO credit scores. For FHA Borrowers With Under 620 FICO Credit Scores , the maximum credit scores allowed for an approve/eligible automated underwriting system finding is 43% DTI.

Debt To Income Ratio Overlays: How Do Underwriters Calculate DTI

Debt To Income Ratios are the total monthly minimum payments a mortgage borrower has divided by the borrower’s 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 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, and 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: Collection Accounts In DTI Calculations

FHA does not require that FHA 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 if the total amount of non-medical outstanding collection accounts is equal to or greater than $2,000 because mortgage lenders will be required to take 5% of the unpaid outstanding collection account balance and add that as a monthly debt to the borrower in the calculations of the borrower’s debt to income ratios even though the FHA Borrower does not have to pay any monthly payments. This rule only applies to non-medical outstanding collection accounts and does not apply to outstanding medical collection accounts nor charge 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 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

Unfortunately, there are many mortgage lenders that will require that outstanding collection accounts and charge off accounts to be paid off before they will approve and close on a mortgage loan with their institution. These are not FHA requirements but the mortgage lenders own requirements  and are called FHA Overlays On Collection Accounts. However, as mentioned earlier, FHA does not require that outstanding collection accounts be paid off and FHA Borrowers do not have to pay off any outstanding collection accounts to qualify for a FHA insured mortgage 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 FHA mortgage underwriters. If the borrower has a sizeable 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 and whatever the monthly written payment agreement is, that amount can be used in lieu of the 5% of the outstanding collection account balance. There is 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 mortgage lender who has no debt to income ratio overlays, contact me at 262-716-8151 or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays to take your calls and answer any questions you may have.

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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