Qualifying For Mortgage With High Front End Debt To Income Ratios

Qualifying For Mortgage With High Front End Debt To Income Ratios

This BLOG On Qualifying For Mortgage With High Front End Debt To Income Ratios Was UPDATED On December 18th, 2017

There are two different types of debt to income ratios:

  1. Front End Debt To Income Ratios
  2. Back End Debt To Income Ratios

A homeowners monthly mortgage payment consists of the following and is called P.I.T.I.

  • Principal
  • Interest
  • Property Taxes
  • Homeowners Insurance

The above is called P.I.T.I. However, many mortgage borrowers have other expenses as part of their monthly housing expense. Front End Debt To Income Ratios includes the housing monthly payment divided by borrower’s gross monthly income. Besides the Principal, Interest, Taxes, and Insurance, other factors that are part of the front end debt to income ratios are the following:

  • Monthly mortgage insurance if applicable
  • Homeowners Association Dues if applicable

Mortgage Insurance is mandatory on conventional loan programs where borrowers put less than 20% down payment.

  • FHA requires a one time upfront FHA Mortgage Insurance Premium and annual FHA Mortgage Insurance Premium for the life of a 30 year fixed rate FHA Loan
  • The one time upfront FHA Mortgage Insurance Premium can be rolled into the FHA Loan balance
  • VA Loans only have a one time upfront funding fee which can be rolled into the VA Loan

Getting Approve/Eligible Per AUS

Front End Debt To Income Ratios are normally not required on all loan programs. However, for FHA, there is a maximum front end and back end debt to income ratio requirement to get an approve/eligible per Automated Underwriting System Approval.

  • The maximum amount allowed for a FHA Automated Approval on front end debt to income ratios for mortgage loan borrowers with credit scores higher than 620 FICO is 46.9% and the back end cannot be greater than 56.9% DTI
  • Back end debt to income ratios are borrowers total monthly payments, which is the sum of the front end debt to income ratios plus any other monthly payments such as the following:
    • Minimum credit card monthly payments
    • Student loan payments
    • Automobile payments
    • Installment/revolving minimum monthly payments
  • Back End Debt To Income Ratios is derived by dividing the total monthly minimum payments by the gross income of the mortgage loan borrower
  • The front end debt to income ratios do not include monthly utility payments, maintenance payments, or other housing expenses such as repairs

Home Buyers always need to take into consideration other expenses they have going out monthly besides the debts that mortgage lenders calculate.

Front End Debt To Income Ratios; Affording Monthly Housing Payment

There are many advantages of being a homeowner versus a renter, however, there are many disadvantages also.

  • Many home buyers do not realize that things can go wrong on a home such as the following:
    • Furnace breakdown during sub zero degree weather
    • Roof leaks
    • Electrical issues
    • Appliance malfunctions
    • Plumbing problems
    • HVAC issues
    • Well and Septic Repairs
  • These are high ticket items that once something goes wrong homeowners need to come out money out of pocket
  • Mortgage Borrowers who barely qualify on a mortgage loan with front end debt to income ratios are at 46.9% and  back end debt to income ratios are at 56.9%, chances are that they will be living pay check to pay check in making monthly mortgage payments

Reserves is always recommended for all homeowners even if mortgage underwriters do not require it. A refrigerator replacement can easily cost couple of thousand dollars.

How Mortgage Underwriters Qualify Borrowers

The Ability To Repay Mortgage (QM: Quality Mortgage) is extremely important.

  • Mortgage Underwriters on calculate debts that are reporting on credit reports and not overall household debt
  • Qualifying for mortgage is one thing, however, the more important question is can the new homeowners afford their new housing payment?
  • Mortgage Underwriters will not count other monthly bills that new homeowners are faced with

Homeowners who live in cold-winter states can have triple gas and utility bills in the winter time. Warm states such as Florida, Arizona, California, Texas, Alabama can have scorching summers where electric and utility bills can be hundreds of dollars per month.

  • Homeowners also need to also consider the monthly utility bills as well as other housing expenses such as the following:
    • Telephone
    • Cable
    • Utilities
    • Internet Service
    • Waste Management Services
    • And other regular monthly maintenance when considering purchasing a new home
  • I strongly recommend that homeowners have reserves in the event if something does go wrong
  • Homeowners insurance will not cover unexpected repairs on your home so you need to keep in mind with having ample reserves, especially during the sub zero winter months

Qualifying For Mortgage With Direct Lender With NO Overlays

Most mortgage lenders have lender overlays, which are mortgage guidelines that are above and beyond those of FHA, VA, USDA, Fannie Mae, and Freddie Mac requires.

  • For example, to get an approve/eligible per Automated Underwriting System on a FHA Loan for borrowers with at least a 620 credit score, FHA allows front end debt to income ratios to be capped at 46.9% and back end debt to income ratios to be capped at 56.9%
  • However, there are many lenders that have overlays on debt to income ratios where they will cap the front end at 31% and back end at 43%
  • This is not a FHA Guideline but rather is a lender overlay on debt to income ratios by the particular mortgage lender

Home Buyers who have higher debt to income ratios and need a direct lender with no overlays can contact The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com. We are available 7 days a week, evenings, weekends, and holidays.

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