FHA Loan With High DTI And Outstanding Collection Accounts

This BLOG On FHA Loan With High DTI And Outstanding Collection Accounts Was UPDATED December 2nd, 2018

Homebuyers can qualify for FHA loans with high DTI.

• Borrowers do not have to pay off outstanding collections and charge off accounts
• However, outstanding non-medical collection accounts can affect when getting an FHA Loan with High DTI
• This is because 5% of the outstanding collection balance is taken into account by lenders when it comes to debt to income calculations
• We will cover on this topic later on this blog

In this article, we will cover and discuss qualifying for an FHA loan with high DTI and outstanding collections.

What Determines DTI Requirements

The two most important factors with the underwriting process of a mortgage are the following:

• Credit and Credit Scores
• Qualified Income and Debt To Income Ratio

HUD, the parent of FHA, has a strict debt to income ratio guidelines.

Front End And Back End Debt To Income Ratios

There are two types of debt to income ratios:

Front End DTI:

• Front End Debt To Income Ratios is the proposed housing payment (P.I.T.I.) divided by the borrower’s monthly gross income

Back End DTI:

• Back End DTI is the housing payment plus the sum of all minimum monthly debt payments of the borrower divided by borrower’s monthly gross income

Automated Underwriting System Approval With High DTI

FHA Guidelines on DTI state the following for an approve/eligible per Automated Underwriting System automated approval:

• Maximum front end debt to income ratio allowed for an approve/eligible per AUS is capped at 46.9% DTI
• Maximum back end debt to income ratio allowed to get an approve/eligible per AUS Findings is a back end DTI of 56.9% DTI
• The above is only with 620 credit scores or higher

Maximum back end debt to income ratio of 43% DTI is allowed for an approve/eligible for borrowers with under 620 credit scores.

Manual Underwriting On FHA Loans

FHA loan applicants who cannot get an automated approval by Automated Underwriting System but get a refer/eligible can get their mortgage loan applications to a manual underwriting with compensating factors.

• FHA underwriters on manual underwriting need to be convinced that the borrower is able to make monthly mortgage payments in a timely manner year after year
• If they feel that the borrower is of high credit risk, they will look to see if the borrower has compensating factors

Compensating Factors

Compensating Factors are positive factors borrowers have that can offset high-risk factors they have.

HUD Guidelines On Compensating Factors:

• Verification Of Rent (VOR) and Payment Shock (Up to $100 increase in mortgage payment versus rental payment and/or 5% in payment shock whichever is less is considered a great compensating factor)
• The borrower has second income that is not used to qualify such as a second full-time job that borrower has been on at least 12 months but not quite 24 months
• Three months of reserves of P.I.T.I. (principal, interest, taxes, and insurance) on proposed home purchase on single-family home purchases
• Six months of reserves on two to four-unit home purchases

Manual Underwriting On FHA Loan With High DTI

Manual Underwriting On FHA Loan With High DTI has the following requirements:

• The maximum debt to income ratio allowed on a manual underwriting with no compensating factors is 31% front end DTI and 43% back end DTI
• The maximum debt to income ratio allowed on manual underwriting with one compensating factor is 37% front end debt to income ratio and 47% back end debt to income ratio

The maximum debt to income ratio allowed on a manual underwrite with two compensating facts is 40% front end debt to income ratio and 50% back end debt to income ratio.

Guidelines On FHA Loan With High DTI

High debt to income ratio is one of the main reasons many mortgage lenders deny mortgage applications.

• Debt to income ratio is calculated by dividing the total monthly payments a borrower has by the gross monthly income
• For example, if the borrower has total monthly payments which total $1,000 per month and gross monthly income is $2,000, then his debt to income ratio is considered to be 50%
• Most lenders do not want borrowers to have a total combined debt to income ratio of more than 45% to 50%
• However, Gustan Cho Associates can go as high as 56.9% DTI on the back end and up to 46.9% on the front end DTI
• Borrowers do not have to pay outstanding collection accounts or charge off accounts to qualify for FHA Loans
• However, non-medical collection accounts with unpaid balances of $2,000 or greater, lenders are required to take 5% of the outstanding collection balance and use it as a monthly debt in calculation of debt to income ratios
• Borrowers do not have to pay the 5%
• However, 5% of the unpaid balance is a theoretical number

If 5% of the outstanding balance is too high and will disqualify the borrower, then the borrower can get a written payment agreement with the collection agency and/or creditor:

• Whatever the written payment agreement states, that figure will be used in calculating the debt to income ratio in lieu of the 5%

Charge off accounts and medical collection accounts with balances are excluded in the 5% rule:

• The proposed housing payment (P.I.T,I.), as well as all other monthly debt payment of the borrower such as:
  • auto payment
  • credit card payments
  • student loan payments
  • installment loan payments
  • 5% of unpaid collection account balances and other debt that reports on the borrowers’ credit report will be used to calculate debt to income ratios

Cell phone bills, cable television, insurance, educational bills, health care, utilities, home internet expenses, and other monthly payments that do not report on credit reports are not included in calculating debt to income ratios.

Overlays On Debt To Income Ratio

Not all lenders have the same debt to income ratio caps on FHA Loans.

• Most lenders will have lender overlays on debt to income ratios

Here is the maximum we can go with FHA Loan With High DTI and no lender overlays:

• 46.9% front end debt to income ratio and 56.9% back end debt to income ratio
• Most lenders will cap the debt to income ratio at 45% to 50% DTI.
• Gustan Cho Associates Mortgage Group specializes in no lender overlays on government and Conventional Loans
• Whatever the AUS Findings are, we just go off AUS Findings and have zero overlays

We specialize in helping borrowers with prior credit problems such as the following:

• bankruptcies
• foreclosure
• collections
• judgments
• tax liens
• late payments
• late payments after bankruptcy and foreclosure
• other credit problems

We are experts in helping home buyers who have high debt to income ratio and need to qualify for a mortgage loan using creative mortgage strategies.

Qualifying For FHA Loan With High DTI

Homebuyers who have high debt to income ratio and have been denied for a mortgage by banks or other mortgage companies, please contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.