Mortgage Denial Due To HIgh Debt To Income Ratio

This BLOG On Mortgage Denial Due To High Debt To Income Ratio Was UPDATED On January 19th, 2019

 

When borrowers apply for a mortgage loan, one key factor that will determine whether they qualify for a loan will be the debt to income ratio. Many borrowers may make more than what lenders qualify them for. But only qualified income can be used to qualify borrowers’ debt to income ratios.

• If borrowers debt to income ratios are high and can barely get an automated approval via Fannie Mae’s Automated Underwriting System, mortgage loan originator needs to carefully monitor income/debt during the mortgage approval process
• There are cases where a ten dollar increase in monthly payments can trigger a mortgage denial due to higher debt to income ratios
• Borrowers cannot go over the maximum debt to income ratio cap limits per FHA and/or Fannie Mae Guidelines

In this article, we will cover and discuss solutions for borrowers with higher debt to income ratios to qualify for a mortgage.

What Are Debt To Income Ratios?

Debt to income ratios is derived by the sum of all of the monthly credit obligations divided by borrowers’ gross monthly income.

• There are two debt to income ratios
• The front end debt to income ratio and the back end debt to income ratio

The front end debt to income ratio is the sum of the following:

• Monthly mortgage payment ( interest and principal )
• Monthly property taxes
• Monthly mortgage insurance premium or private mortgage insurance premium
• Homeowners insurance
• Homeowners association fees ( if applicable)

Add the total housing payments and divide it by borrower monthly gross income will yield the front end debt to income ratios:

• Utility payments, cable payments, internet payment, and other optional payments are not calculated in front end debt to income ratios
• The maximum cap on the front end debt to income ratio allowed for a borrower to get an approved eligible per DU FINDINGS is 46.9%

Back End Debt To Income Ratios

The back end debt to income ratio is calculated by adding the sum of borrowers total monthly credit obligations which include proposed housing expenses ( the front end housing payments)  plus any other monthly payments which are minimum monthly payments of the borrower:

• Credit card payments
• Automobile monthly payments
• Student loan payments
• Alimony
• Child support

Or any other monthly credit obligations divided by borrowers’ gross monthly income.

• The maximum back end debt to income ratio cap for a borrower to get an approve eligible per DU FINDINGS is 56.9% for an FHA loan
• On FHA Manual Underwrites, we can go as high as 50% debt to income ratios
• Conventional Loans allows up to 50% DTI
• Anything over this cap will get a mortgage denial due to high DTI

A mortgage loan officer needs to find a creative way of fixing the problem.

Potential Solutions For High DTI Problems

Borrowers who have high DTI going into the mortgage application, anything additional payment can trigger a mortgage denial due to high debt to income ratio so be prepared for potential solutions.

• One common problem that triggers higher debt to income ratios is when the insurance premium is higher than expected
• Other times, the mortgage loan originator did not calculate that the property needed flood insurance
• Other potential problems are that mortgage underwriters do not allow part-time, overtime, or other income in the income qualification calculation

Verification of Employment is highly recommended on higher DTI borrowers.

Solutions For Higher DTI

There are potential solutions that can resolve the debt to income ratio issues:

• If it is an FHA loan, the borrower can get a non-occupied co-borrower
• Pay off the balances of certain outstanding loans such as automobile loans, credit card debts, or installment debts
• Buydown the rate so mortgage payments will be much less than the rate originally quoted

Buying down the rate can be costly but you can use sellers concessions to buy down the rate.

Qualifying For Mortgage With Direct Lender With No Overlays On Debt To Income Ratios

Most lenders will have overlays on debt to income ratios. Borrowers who need to qualify for a mortgage with a debt to income ratio issue with a national lender with no overlays on government and/or conventional loans, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates has ZERO OVERLAYS on FHA and VA Loans. With FHA, to get an approve/eligible per AUS Findings, borrowers can have up to 46.9% front end and 56.9% back end debt to income ratios. VA does not have a debt to income ratio cap. Most VA lenders do have overlays on debt to income ratio on VA Loans. Gustan Cho Associates Mortgage Group does not. We recently got a VA borrower with a 580 credit score and a 60% debt to income ratio closed.