Debt-To-Income Ratio Overlays

Debt-To-Income Ratio Overlays Versus Agency Guidelines

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers debt-to-income ratio overlays versus agency mortgage guidelines. We will be discussing what debt-to-income ratio overlays by independent lenders are. Debt To Income Ratio Overlays is additional guidelines that an individual lender sets on top of the minimum lending requirements mandated by the particular mortgage loans program, such as FHA, VA, USDA, Fannie Mae, and Freddie Mac.

HUD requires the borrower can have a debt-to-income ratio of up to 46.9% front-end and 56.9% back-end DTI on FHA loans.  This holds true if 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. This holds no matter what the borrower’s credit scores are. Some lenders may have debt-to-income ratio overlays. The following paragraphs will discuss mortgage lenders with debt-to-income ratio overlays.

Mortgage Lenders With Debt-To-Income Ratio Overlays

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Many mortgage lenders require the borrower to have a maximum debt-to-income ratio requirement of 45% if their credit scores are below 640. The lender may increase it to 50% debt to income ratio overlays on borrowers with 640 FICO and higher credit scores. They may not accept the FHA debt-to-income ratio maximum of 56.9% DTI.

There are many lenders that will have debt-to-income ratio overlays that state borrowers of credit scores under 680 FICO, the maximum debt-to-income ratio can have is 45%. Any borrowers with credit scores of 680 FICO or higher, 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 NEXA Mortgage, LLC dba as Gustan Cho Associates 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 score 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 DTIDebt 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, monthly installment payments, and the proposed principal, interest, taxes, and 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 mortgage underwriters calculate 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, other monthly minimum payments that the borrower has that reports on the borrower’s credit report.

Debt-To-Income Ratio Overlays On Collection Accounts In DTI Calculations

HUD does not require Borrowers to pay off outstanding collection accounts 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.

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

This is because lenders must 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 monthly payments. It does not apply to outstanding medical collection accounts or 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 a $2,000 balance will not be factored in the calculations of debt-to-income ratios.

Debt-To-Income Ratio Overlays on Collection Accounts To Be Paid Off

Unfortunately, many lenders will require that outstanding collection accounts and charge-off accounts be paid off before they will approve. They will also require outstanding pay 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 lender’s requirements and are called HUD 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.

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 borrower’s debt-to-income ratios by underwriters. Suppose the borrower has a large outstanding non-medical outstanding collection account balance, and 5% of the outstanding collection account balance exceeds the maximum debt-to-income ratio limits allowed. In that case, the borrower can set up a written payment agreement with the creditor or collection agency.

Whatever the monthly written payment agreement is, that amount can be used instead of 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 searching for a lender with no debt-to-income ratio overlays, contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at We are available seven days a week, evenings, weekends, and holidays to take your calls and answer any questions you may have.

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