This BLOG On High Debt To Income Ratio Mortgage Solutions To Meet DTI Guidelines Was UPDATED And PUBLISHED On October 3rd. 2020
By Gustan Cho NMLS ID 873293
Debt to income ratio and credit is the two most important factors in the mortgage approval process. Debt to income ratio is calculated by adding the total minimum monthly payments and dividing it by the mortgage borrower’s monthly gross income. For example, lets take a case study on Mortgage Applicant A.
Here are Mortgage Applicant A’s monthly minimum payments:
- Capital One……………………………….Minimum monthly payment of $100.00 and credit balance of $2,000
- USAA Credit Card………………………Minimum monthly payment of $50.00 and credit balance of $1,000
- XYZ Auto Finance………………………Minimum monthly payment of $400.00 and balance of $10,000
- Proposed mortgage payment which includes principal, interest, taxes, and insurance $1,500.00
- Total monthly minimum payments of $2,050.00
- Total monthly gross income of $3,700.00
In this article, we will cover and discuss on how to resolve high debt to income ratios so borrowers can qualify for a mortgage.
Front End Debt To Income Ratio
The maximum FHA front end debt to income ratio allowed is 46.9% and the maximum FHA back end debt to income ratio allowed is 56.9% in order to get an approve/eligible per DU FINDINGS, which is the Automated Underwriting System.
- The front end debt to income ratio is also known as the housing debt to income ratio
- Front End DTI is the proposed housing payment of the principal, interest, taxes, and homeowners insurance divided by borrower’s monthly gross income
- On this case is $1,500.00 proposed housing payment divided by the mortgage loan borrower’s $3,700.00 monthly gross income which yields 41% front end debt to income ratio
- This is lower than the 46.9% maximum front end debt to income ratio allowed to get an approve/eligible per Automated Underwriting System Findings
So on the front end debt to income ratio, the mortgage loan applicant qualifies.
Back End Debt To Income Ratio
The back end debt to income ratio is calculated by the following:
- taking the sum of the proposed new housing payment, which in this case is $1,500.00
- Plus all other minimum monthly debt obligations
- This yields $2,050.00
- Take the $2,050.00 and divide it by borrower’s monthly gross income, which is $3,700.00
- Dividing $2,050.00 by $3,700.00 yields 55% back end debt to income ratios
This is lower than the maximum 56.9% allowed by FHA mortgage guidelines to get an automated approval.
Using Adjustable Rate Mortgages As High Debt To Income Ratio Mortgage Solutions
Adjustable Rate Mortgages have lower interest rates than fixed rate mortgages. One of the easiest and quickest High Debt To Income Ratio Mortgage Solutions is by choosing a 7/1 ARM instead of a 30 year fixed rate mortgage.
- Borrowers who choose a 5/1 ARM may have rates lowered by 0.125% than a 7/1 ARM
- However, with 5/1 ARMs, lenders will add an additional 2% about the note rate as the qualifying rate
- For example, if the 5/1 ARM note rate is 4.0%, lenders will need to increase it by 2.0% and use the 6.0% as the qualifying rate and not go off the 4.0% note rate
- However, with a 7/1 ARM, lenders only use the note rate
- The note rate on 7/1 ARM is the qualifying rate
- The difference in rates between a 7/1 ARM versus 5/1 ARM is only 0.125%
Going with 7/1 ARM often are a great high debt to income ratio mortgage solutions.
Adding Non-Occupant Co-Borrowers
HUD, the parent of FHA, allows multiple non-occupant co-borrowers to be added on FHA Loans.
- Adding non-occupant co-borrowers is often the best and easiest High Debt To Income Ratio Mortgage Solutions
- Non-Occupant Co-Borrowers need to meet all FHA Guidelines and is treated like the main borrower
- They can be out of state and be on social security and/or pension income
- Non-Occupant Co-Borrowers can own their own home as well
Non-Occupant Co-Borrowers need to be related to borrowers by blood, law, marriage.
Mortgage Approval Process Leading To Clear To Close
There are stages of the mortgage approval process that every mortgage loan applicant needs to go through.
- Once everything has cleared, the ultimate goal is to get a clear to close
- A clear to close is issued by the underwriter and is clear to fund and close on either the home purchase or the refinance home loan
- Prior to getting a clear to close, the underwriter will do a soft credit pull on every borrower
- Whether the credit scores went up or dropped does not affect the mortgage approval
- However, the underwriter is checking on whether or not the borrower has incurred more debt
- Whether the mortgage loan borrower’s debt to income ratios are still in line with the maximum allowed is checked
- the borrower has charged up credit cards
- the monthly debt obligations exceed the maximum 56.9% cap allowed in order to get an approve/eligible per DU FINDINGS, the clear to close cannot be issued by the underwriter
- The mortgage approval will be placed on a suspense status until the debt to income ratios fall in line below the 56.9% maximum allowed
What Are High Debt To Income Ratio Mortgage Solutions When The Final Credit Pull Reflects Higher DTI
Every mortgage lender has its own rules and regulations when incidents like these happen. There are High Debt To Income Ratio Mortgage Solutions for borrowers with higher DTI:
- Some stricter lenders have a policy of denying the mortgage application
- Other lenders may require borrower pay off the credit card and close out the credit card account
- Yet other more lenient lenders and offer High Debt To Income Ratio Mortgage Solutions
- May just borrowers just pay off the credit card balance or other debt obligations in solving What Are High Debt To Income Ratio Mortgage Solutions
- Mortgage processor needs to do credit supplement and show the proof of payment
After the DTI is in line and borrowers get AUS Approval, the underwriter will issue the clear to close.
Do Not Incur New Debt During Mortgage Process
Just because borrowers have the required down payment and closing costs and have a loan approval does not guarantee that borrowers will be issued and a clear to close will be issued.
Borrowers need to make sure they do not do the following:
- get new credit
- incur debt
- change jobs
- purchase or trade in their automobile
- or be late with any credit payments during the mortgage approval process
Any of the preceding factors can be a reason for a mortgage loan denial.
Charging Up Credit Card Balance
Charging up credit cards during the mortgage process can be detrimental to borrowers with higher debt to income ratios
- Many home buyers want to purchase new furniture and apply for new credit at furniture stores or charge up their credit cards
- Unfortunately, incurring more debt will reflect an increase of monthly debt obligations
- Often times can turn into a mortgage loan denial
- Home buyers with higher debt to income ratios need to wait until they close on their loan to purchase new furniture, lawn equipment, or appliances
- The borrower can bet that a final soft credit pull will be done by underwriting prior to the issuance of a clear to close
Home Buyers who need more information on What Are High Debt To Income Ratio Mortgage Solutions please contact us at 262-716-8151 or text us for a faster response. Or email us at email@example.com.