High Debt-to-Income Ratio Mortgage Solutions To Meet DTI Guidelines

High Debt-To-Income Ratio Mortgage Solutions

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers high debt-to-income ratio mortgage solutions for borrowers. Debt-to-income ratio and credit is the two most important factors in the mortgage approval process.  The 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, let’s 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

Having a high debt-to-income (DTI) ratio can pose challenges in managing finances and obtaining credit. Here are some potential solutions to consider if you’re dealing with a high DTI ratio: In this guide, we will cover how borrowers can resolve high debt-to-income ratio to meet the minimum mortgage guidelines so they can qualify for a mortgage.

Front-End Debt-to-Income Ratio

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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. The front-end DTI is the proposed housing payment of the principal, interest, taxes, and homeowners insurance divided by the borrower’s monthly gross income.

Remember that addressing a high DTI ratio may take time and require discipline and commitment. It’s essential to stay focused on your long-term financial goals and take proactive steps to improve your financial health.

In this case, is $1,500.00 proposed housing payment divided by the mortgage loan borrower’s $3,700.00 monthly gross income which yields a 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.

High Debt-to-Income Mortgage Solutions

One quick high debt-to-income ratio mortgage solutions include increase income of the borrower or borrowers. Look for opportunities to increase your income. This could involve negotiating a raise at your current job, taking on additional work or freelance projects, or exploring alternative sources of income such as rental properties or investments.

Focus on paying down your existing debt to reduce your DTI ratio. Consider using the debt snowball or debt avalanche method to prioritize paying off high-interest debt first.

You may also want to explore debt consolidation options to streamline your debt payments and potentially lower your interest rates. Review your budget and identify areas where you can cut expenses. Trim discretionary spending, negotiate lower bills for services like cable or internet, and look for ways to save on everyday expenses such as groceries and transportation. Redirect the money saved towards paying down debt. Click here to qualify for mortgage Loan with low credit scores

Refinance High Interest Loans

Explore options to refinance high-interest loans or mortgages to lower your monthly payments. Refinancing can help you secure a lower interest rate, extend the repayment period, or change the terms of the loan to make it more manageable. If you’re planning to take out a mortgage, increasing your down payment can help lower your DTI ratio and improve your chances of loan approval. Saving up for a larger down payment may require patience and disciplined saving but can pay off in the long run.

Back-End Debt-to-Income Ratio

The back-end debt-to-income ratio is calculated by 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 the 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 of 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-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.

With 5/1 ARMs, lenders will add an additional 2% on top of 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%. The 6.0% rate will be used as the qualifying rate and not the 4.0% note rate.

With a 7/1 ARM, lenders only use 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 is a great high debt-to-income ratio mortgage solution.

Adding Non-Occupant Co-Borrowers

Adding Non-Occupant Co-BorrowersHUD, the parent of FHA, allows multiple non-occupant co-borrowers to be added to 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 are treated like the main borrower. They can be out of state and be on social security 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.

Case Scenario of High Debt-to-Income Ratio Mortgage Solutions

Let’s take a case scenario of high debt-to-income ratio mortgage solutions. 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.

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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 is 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 borrowers to pay off the credit card and close out the credit card account.

Consider consulting with a financial advisor or credit counselor who can provide personalized guidance and strategies for managing your debt and improving your financial situation.

Financial advisors or certifified financial planners can help you create a plan tailored to your specific goals and circumstances. 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. Improving your credit score can make it easier to qualify for loans and credit with more favorable terms. Focus on making timely payments, reducing credit card balances, and avoiding opening new accounts unnecessarily. You can also consider techniques like credit piggybacking or becoming an authorized user on someone else’s credit card to potentially boost your score.

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 in monthly debt obligations.

Often times can turn into a mortgage loan denial. Homebuyers 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. Homebuyers who need more information on what are high debt-to-income ratio mortgage solutions please contact us at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.

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