FHA Loan With High Debt To Income Ratios
This BLOG On Qualifying For FHA Loan With High Debt To Income Ratios And No Overlays Was Updated ON March 28, 2017
Borrowers can qualify for FHA Loan With High Debt To Income Ratios with lenders that has no overlays. Many folks believe that all lenders have the same FHA Mortgage Requirements. However, that is not the case. All lenders originating and funding FHA Loans need to meet the minimum FHA Guidelines, however, a lender can have their own lending requirements that is above and beyond than those of the minimum FHA Mortgage Requirements. These additional requirements are called FHA Lender Overlays. There are two types of debt to income ratios. The two types of debt to income ratios lenders look at are the following:
- Front End Debt To Income Ratios which is also called the Top Debt Ratio
- Back End Debt To Income Ratios which is called the Back End Ratio
What Are Debt To Income Ratios
There are two types of debt to income ratios lenders look at. Most lenders do not require the front end debt to income ratios and only go by the back end debt to income ratios. However, most lenders do have overlays on debt to income ratios and those that do have FHA Lender Overlays will require a front DTI cap.
Front End Debt To Income Ratios
- The Front End Debt To Income Ratios or Top Debt Ratio is defined as the borrowers monthly proposed housing payment divided by the borrower’s monthly gross income.
The borrower’s housing payments consists of the following breakdowns:
- The first mortgage of the proposed home which is principal and interest
- Monthly property taxes which is the annual property taxes divided by 12.1st mortgage payment on home
- Monthly homeowners insurance payment. This figure is derived by taking the annual homeowners insurance premium divided by 12 months
- The monthly homeowners association dues if applicable
- If the borrower has a second mortgage payment, the monthly second mortgage payment is part of the front end debt to income ratios
What Is P.I.T.I.?
Mortgage borrowers often run into the term of P.I.T.I. This term refers to the following:
P.I.T.I. is not equivalent to monthly housing expenses for folks who have homeowners association dues and/or second or third mortgages.
What Are The Requirements In Qualifying For FHA Loan With High Debt To Income Ratios
FHA Home Buyers and Homeowners needing refinance on their home loans can qualify for FHA Loan with high debt to income ratios. This can be confusing to explain so I will take it step by step. To get an approve/eligible per Automated Underwriting System, there is a correlation between credit scores and debt to income ratios.
- To get an approve/eligible per DU/LP FINDINGS PER AUS with credit scores below 620 FICO, the maximum debt to income ratios permitted is 43% DTI.
- There is no front end debt to income ratio requirements but a lender can have overlays on front end DTI and most with overlays will cap the front end DTI to 31% to 33%.
- To get an approve/eligible per DU/LP FINDINGS PER AUS with credit scores higher than 620 FICO, the maximum debt to income ratios permitted is the following: 46.9% front end DTI and 56.9% DTI.
How To Calculate Back End Debt To Income Ratio
Back end debt to income ratios is calculated as follows:
- Total Housing Expenses PLUS All other monthly debt payment: Take these sums and divide it by borrowers monthly gross income
Monthly Debt Payments That Is Included In The Back End Debt To Income Ratio Calculations Are The Following:
- Auto Payments
- Student Loan Payments
- Minimum Monthly Revolving Account Payments
- Minimum Monthly Installment Loan Payments
- Any other minimimum monthly payments that reflect on credit bureaus
Debts Not Included In DTI Calculations
Home buyers should keep this in mind when buying a home: How Much Home Can I Afford? Home buyers can qualify for FHA Loan With High Debt To Income Ratios as high as 56.9% with lenders with no overlays on DTI, but mortgage underwriters do not count the following when calculating DTI:
- Monthly utilities such as water bills, electric bills, and gas bills
- Internet bills, home phone bills, cell phone bills, and cable bills
- Scavenger service
- Medical insurance
- Child Care
- Elderly care
- School Tuition
- After School Activities
- Family Vacations
- Weekly/Monthly Groceries
- Deductions from payroll such as 401k/Pension
Borrowers need to take into account their personal finances and judge if they are buying too much home. Nobody wants to be in a situation where they are house poor because all of the income they make will go to their housing payments.