This BLOG On High Debt To Income Ratio Due To Credit Card Balance Was UPDATED And PUBLISHED On July 18th, 2020
Home Buyers planning on applying for a home purchase loan or a refinance mortgage loan, make sure to have credit card balances paid prior to the start of the mortgage process . High Debt To Income Ratio Due To Credit Card Balance is often the main issue with borrowers.
- There are strict debt to income ratio requirements mortgage borrowers need to adhere to
- Maximum debt to income ratio caps on conventional loans is 50%
- Maximum debt to income ratio caps for FHA loan programs are capped at a maximum 46.9% front end and 56.9% back end to get an approve/eligible per Automated Underwriting System Approval
In this article, we will discuss and cover issues with qualifying for a mortgage with High Debt To Income Ratio.
Meeting DTI Mortgage Guidelines
Borrowers need to qualify with these debt to income ratio parameters:
- But during the mortgage process debt to income ratio can exceed the maximum allowed
- One of the ways borrowers can still qualify for a mortgage and for mortgage process to proceed to get a clear to close issued is to solve the debt to income ratio problems
- One of the best solutions in lowering debt to income ratios is by paying off credit card debt
- By paying off the credit card balances consumers eliminate the minimum monthly credit card payments
This will lower debt to income ratios.
High Debt To Income Ratio Due To Credit Card Balance Can Be Resolved By Paying Down Balance
Debt to income ratios can go up during the mortgage approval process. High Debt To Income Ratio Due To Credit Card Balance can easily be resolved:
Debt To Income Ratios can increase due to the following:
- having a larger monthly housing payment due to higher rates, homeowners insurance, property taxes than originally anticipated
Or overall monthly payment due to a larger than expected:
- homeowners insurance premium
- higher interest rate
- higher homeowners association dues
- higher than expected flood insurance
One of the easiest solutions to overcome High Debt To Income Ratio Due To Credit Card is to pay off existing credit card balances.
High Debt To Income Ratio Due To Credit Card Balance: Paying Down Credit Card Balances To Lower DTI
When mortgage underwriters suggest borrowers pay off certain credit card balances off in order for the debt to income ratio in line with the maximum allowed per mortgage guidelines they may also request to close them out.
- The underwriter may request that once they are paid to close out the credit card accounts to close out the credit card accounts
- This is very common for a mortgage underwriter to request
- It may also state per DU FINDINGS that borrowers pay off and close out existing credit card accounts after they pay off the balances
- This is often the case with Fannie Mae DU Automated Underwriting System
However, Freddie Mac LP Automated Underwriting System will allow borrowers to pay outstanding credit card balances and not close out the credit card accounts.
Can I Re-Open My Credit Card Accounts After I Close On My Mortgage Loan?
There is nothing on the mortgage note that refrains borrowers from re-opening credit card accounts that they needed to close out to qualify for a mortgage loan. The minute borrowers close on the mortgage loan, borrowers can contact credit card companies and see if they will re-open the credit card accounts they have recently closed to qualify for a mortgage.
Other Debts That Affect Debt To Income Ratios
Student Loans and Car Loans are the top two credit tradelines that affect debt to income ratios.
- Gustan Cho Associates Mortgage Group has creative solutions in helping borrowers with higher debt to income ratios
- The Gustan Cho Team has no overlays on government and student loans
- We can go as high as 46.9% front end and 56.9% back end debt to income ratios to get an approve/eligible per Automated Underwriting System on FHA Loans
- Most lenders have debt to income ratio overlays capped at 45% to 50% on FHA Loans
- Gustan Cho Associates Mortgage Group has no credit score nor debt to income ratio requirements on VA Loans
- Most lenders have overlays on VA Loans where they only accept veteran borrowers with 620 to 640 credit scores
- GCA Mortgage Group have approved veteran borrowers with 60% debt to income ratios where it is unheard of by most lenders
- Most lenders have debt to income ratio caps at 45% to 50%
The U.S. Department Of Veteran Affairs does not have any minimum credit score nor debt to income ratio requirements on VA Loans.
Mortgage With High Student Loan Balances
Here are the guidelines with student loans:
- Deferred Student Loans that have been deferred for more than 12 months are exempt from VA Debt To Income Ratio Calculations
Student Loan Balances on VA Loans is calculated as follows:
- 5% of the student loan balance is taken and divided by 12 months
- That figure is the figure that is used as a monthly hypothetical debt in calculating debt to income ratios on VA Loans
USDA and FHA Student Loan Guidelines are the same:
- FHA Loans and USDA Loans require 1.0% of the student loan balance to be used as a hypothetical monthly student loan debt
- However, FHA and USDA loans will allow borrowers to get a fully monthly amortized payment over an extended-term (25 years) in writing and that payment can be used as monthly student loan debt
- This figure normally turns out to be 0.50% in lieu of 1.0%
- Deferred Student Loans are not exempt on FHA and USDA Loans
- Income-Based Repayment (IBR) is allowed by Fannie Mae and Freddie Mac for Conventional Loans
- IBR Payment needs to report on the borrower’s credit report
Car Payments have a huge impact on debt to income ratio calculations. The reason is auto loans are amortized over 3 to 7 years. With the shorter amortization, it yields a higher payment. A $400 car payment is equivalent to $80,000 buying power. Contact us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for a faster response with any questions.
High Debt To Income Ratio Due To Credit Card Balance: Lower Debt To Income Ratio Prior To Applying For A Mortgage
Borrowers do not want to be maxed out on credit cards prior to applying for a mortgage. Borrowers need to meet debt to income ratios when they are applying for a mortgage loan. Make sure to have sufficient room in debt to income ratios where if some line items do turn out to be more than anticipated borrowers do not go over the debt to income ratio caps. Going over the debt to income ratio caps during the mortgage approval process can cause delays in mortgage closings. Borrowers who need to pay down or pay off your credit card balances might be forced to close out the hard-earned payment history of credit card accounts.
This BLOG On High Debt To Income Ratio Due To Credit Card Balance Was UPDATED On July 18th, 2020