Getting Denied For Mortgage Due To High Debt To Income Ratio
When you apply for a mortgage loan, one key factor that will determine whether you qualify for a loan will be your debt to income ratio. If your debt to income ratios are high and you barely get an automated approval via Fannie Mae’s Automated Underwriting System, your mortgage loan originator needs to carefully monitor you mortgage approval process. There are cases where a ten dollar increase in monthly payments can trigger a mortgage denial due to going over the maximum debt to income ratio cap limits per FHA and/or Fannie Mae Guidelines.
What Are Debt To Income Ratios?
Debt to income ratios are derived by the sum of all of your monthly credit obligations divided by your 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 your 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), divided by your monthly gross income. Utility payments, cable payments, internet payment, and other optional payments are not calculated in your 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 your total monthly credit obligations which include your proposed housing expenses ( the front end housing payments) plus any other monthly payments which are minimum credit card payments, automobile monthly payments, student loan payments, alimony, child support, or any other monthly credit obligations divided by your 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 a FHA loan and 43% for a FHA loan per manual underwrite and 43% for conventional loans. Anything over this cap will get you a mortgage denial and you and your mortgage loan officer need to find a creative way of fixing the problem.
Potential Solutions For High Debt To Income Ratio Problems
If you have high debt to income ratio going into the mortgage application, anything additional payment can trigger a mortgage denial so you need to be prepared for potential solutions. One common problems that trigger higher debt to income ratios is when your insurance premium is higher than expected. Other times, the mortgage loan originator did not calculate that the property needed flood insurance. Other potential problems is that mortgage underwriters do not allow part time, overtime, or other income in the income qualification calculation. There are potential solutions that can resolve the high debt to income ratio issues.
1. If it is a FHA loan, the mortgage loan borrower can get a non-occupied co-borrower.
2. Pay off the balances of certain outstanding loans such as automobile loans, credit card debts, or installment debts.
3. Buy down the rate so your mortgage payments will be much less than the rate you were quoted. Buying down the rate can be costly but you can use sellers concessions to buy down the rate.