Debt To Income Ratio Required For Mortgage Depends On Loan Program

This Article Is About Debt To Income Ratio Required For Mortgage

Many mortgage applicants assume they will be guaranteed 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 broker and aggressively shop for a house. Homebuyers entering into a purchase contract without getting qualified by a loan officer is asking for trouble. Never shop for a home and enter into a purchase contract. This holds true no matter how great your credit is.

There are buyers who have not been qualified by a loan officer without a pre-approval who find a deal of a lifetime and need to act fast. In today’s hot housing market, there are multiple purchase offers on homes. Homebuyers should plan ahead and get qualified by a loan officer and have a solid pre-approval letter. Do not be in a situation where you find a home that you fall in love with which the seller wants to close in 3 weeks and you have not been qualified.

How Fast Can A Home Purchase Close?

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 processor’s 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.

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 reports. The mortgage loan originator should carefully look at the 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

Front End Debt To Income Ratio Required For 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 ratios. The first is the 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 borrower monthly gross income is $10,000 per month
  • the housing expense to income ratio is $3,000 divided by $10,000
  • this yields a 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 do 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 front-end DTI allowed by HUD is 46.9% and 56.9% back-end on FHA loans. Fannie Mae and Freddie Mac do not have a front-end debt to income ratio requirement. The maximum debt to income ratio allowed on Fannie Mae and Freddie Mac is 50% DTI. There is no debt to income ratio cap on VA loans. USDA requires a maximum front end of 29% and 41% back-end DTI. Gustan Cho Associates have traditional jumbo loans that allow up to a 50% debt to income ratio. Most non-QM loans cap DTI at 50% to 55%.

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 the debt to income ratio. If you have a higher debt to income ratio and need a lender with no overlays on DTI, contact us at Gustan Cho Associates at 262-716-8151 or text for a faster response. Or email us at [email protected]

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