Debt To Income Ratio Required For Mortgage Depends On Loan Program
This BLOG On Debt To Income Ratio Required For Mortgage Was UPDATED On May 13, 2017
Many mortgage applicants assume they will be guaranteed a mortgage approval because they have excellent credit scores, cash reserves, and a lot of assets.
- They do not take time with consulting a banker or mortgage broker and aggressively shop for a house.
- Then they find a deal of a lifetime and need to act fast because there are multiple purchase offers on the property they fell in love with in which the seller wants to close in 3 weeks.
- Can a real estate purchase mortgage close in 3 weeks? The answer is yes.
- Real estate purchase mortgage can close in 3 weeks but would need everyone from the buyer, seller, appraiser, and processors cooperation to make it happen without any hiccups.
- Can we assume that the buyer, who has a credit score of 830 FICO credit scores, always pays his bills on time, and has a $100,000 annual gross income qualify? From the credit stand point, he looks good but we can never assume that the borrower is qualified.
Debt To Income Ratios Are More Important Than Credit Scores
The number one reason why borrowers get last minute mortgage loan denials or stress during the mortgage process is because they were not properly qualified by their loan officers.
- Loan officers need to thoroughly qualify mortgage applicants prior to issuing pre-approval letter.
- Loan officers should thorough review borrowers credit report and look for overall credit payment history, see if there is any credit disputes, see if all credit items are correct with no errors.
- Double check recorded date of foreclosures, deed in lieu, short sale.
- Make sure that there are no late payments after bankruptcy and/or foreclosures
- One of the main reasons why borrowers with high credit scores and high income get denied for a mortgage is because their debt to income ratios is too high.
- Make sure that the lender the loan officer works for does not have any overlays on debt to income ratios.
Front End Debt To Income Ratio Required For Mortgage
Mortgage lenders are concerned not only with credit profile but also with the housing expense and overall monthly expenses compared to the gross monthly income. This is called Debt To Income Ratio Required For Mortgage .
- There are two types of debt to income ratio
- The first is housing Debt To Income Ratio Required For Mortgage which is calculated by taking the monthly housing expenses divided by the borrower’s monthly gross income.
- For example, if the mortgage payment, property taxes ,association dues, mortgage insurance (if any ) and homeowners insurance payment is $3,000 per month and the borrowers monthly gross income is $10,000 per month, the housing expense to income ratio is $3,000 divided by $10,000 which yields 30% housing debt to income ratio.
- FHA allows a maximum of 46.9% front end debt to income ratio to get an approve/eligible per AUS FINDINGS for borrowers with credit scores of 620 FICO or higher.
- Both Fannie Mae and Freddie Mac does not have front end debt to income ratio requirements.
Back End Debt To Income Ratio Required For Mortgage
The second debt to income ratio Debt To Income Ratio Required For Mortgage that lenders are concerned about is the total monthly expenses to your monthly gross income ratio. This ratio is known as the back end ratio.
- The back end ratio is the sum of the housing expenses plus all other minimum monthly payments divided by the borrower’s total monthly gross income.
- The monthly expenses that includes in calculating the back end debt to income ratio are monthly credit card payments, automobile payments, student loan payments, child support payments, and other fixed monthly payments like second home mortgage payments, motorcycle payments ( if any ), and the proposed new mortgage payment, homeowners association dues (if any), property taxes, private mortgage insurance premium (if any), and homeowners insurance.
- All of these combined monthly expenses divided by gross monthly income will yield the back end combined debt to income ratio.
- For example, if the total combined monthly debt expenses is $5,000 and the monthly income is $10,000, the back end debt to income ratio will be 50%.
- The maximum debt to income ratio allowed by FHA is 56.9% and the maximum allowed by Fannie Mae is 45% DTI.
- Freddie Mac allows DTI up to 50% DTI.
Most mortgage lenders do have lender overlays on debt to income ratios. For example, FHA will allow up to 56.9% DTI but a lender may cap the debt to income ratio requirements at 50%. This is called a lender overlay on debt to income ratio. If you have higher debt to income ratios and need a lender with no overlays on DTI, contact Gustan Cho at 800-900-8569 or text Gustan on his cell at 262-716-8151 for faster response or email us at email@example.com.