Debt To Income Ratio Required For Mortgage Depends On Loan Program

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This BLOG On Debt To Income Ratio Required For Mortgage Was UPDATED And PUBLISHED On January 30th, 2020

Why a debt-to-income ratio is required for a mortgage

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
  • This is because there are multiple purchase offers on the property they fell in love within 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
  • They 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 standpoint, he looks good but we can never assume that the borrower is qualified

In this article, we will cover and discuss the importance of consumers’ debts when qualifying for a mortgage.

Debt To Income Ratios Are More Important Than Credit Scores

The number one reason why borrowers get last-minute loan denials or stress during the mortgage process is that they were not properly qualified by their loan officers.

  • Loan officers need to thoroughly qualify mortgage applicants prior to issuing a pre-approval letter
  • Loan officers should thoroughly review borrowers credit report
  • Loan officers should carefully look at overall credit payment history
  • They should see if there are any credit disputes
  • Check to 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

What is the debt-to-income ratio required for a 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
  • DTI is calculated by taking the monthly housing expenses divided by the borrower’s monthly gross income

For example, let’s take a case scenario:

    • 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
    • this yields 30% housing debt to income ratio

HUD 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 include in calculating the back end debt to income ratio are the following:

  • monthly credit card payments
  • automobile payments
  • student loan payments
  • child support payments

other fixed monthly payments like the following:

  • 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 are $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%
  • The maximum allowed by Fannie Mae and Freddie Mac is 50% DTI

Most lenders do have lender overlays on debt to income ratios. For example, HUD 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 a higher debt to income ratios and need a lender with no overlays on DTI, contact us at Gustan Cho Associates at 262-716-8151 or text for faster response. Or email us at gcho@gustancho.com.

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