High Debt To Income Ratio Solutions For Mortgage Approval
There are many high debt to income ratio solutions for borrowers so they can meet the DTI guidelines on the particular mortgage loan program they need to qualify. The debt to income ratio is a determinant in mortgage qualification and the mortgage approval process. There are many high debt to income ratio solutions borrowers can take to qualify for a mortgage. Mortgage lenders put a lot of weight on debt to income ratio. Lenders are concerned high debt to income ratios will have an impact on borrowers being able to repay their mortgage.
Debt To Income Ratio Guidelines ON Government And Conventional Loans
Borrowers can have excellent income and perfect credit but if they have high debt to income ratio where it exceeds the maximum debt to income ratio requirements by:
- Fannie Mae
- Freddie Mac
- VA guidelines
The mortgage loan application will not qualify and will not close.
High Debt To Income Ratio Is The Number One Reason For Mortgage Denial
Before a mortgage application gets submitted to the underwriting department, the loan officer and processor should make sure the borrower’s debt to income ratio is in line with the required debt to income ratio parameters required. If the loan officer or mortgage processor is not sure on qualified income due to irregular overtime, part-time, or bonus income, they should get a verification of employment and income before they issue a pre-approval letter. Income qualification is very important and need to be double checked before the loan proceeds to underwriting.
What Is Debt To Income Ratio?
There are two types of debt to income ratios when it comes to the mortgage application process.
The front end debt to income ratio consists of the following:
The above PITI of the subject property divided by the borrower’s gross monthly income yields the front end DTI
The back end debt to income ratio is the sum of the following:
As well as all other monthly minimum debt payments of the mortgage loan borrower such as minimum credit card payments such as the following:
- Auto loans
- Student loans
- Child support payments
- Alimony payments
- And all other monthly minimum credit obligations
- Take the total of the above divided by the borrower’s monthly gross income yields the back end DTI
DTI Requirements On Loan Programs
Conventional loans normally have a debt to income caps at 50% back end debt to income ratio caps:
- FHA loans front end debt to income ratio caps are set at 46.9% debt to income ratio and 56.9% back end debt to income ratio to get an approve/eligible per Automated Underwriting System
- VA Loans does not require a front end debt to income ratio and the back end debt to ratio max can be higher than the 60% debt to income ratio
- USDA Loans DTI are capped at 29% front end and 41% back end
- Condotel and Non-Warrantable Condo Loans have a debt to income ratio caps at 43% back end debt to income ratio caps
Non-QM and alternative mortgage wholesale lenders normally will allow the maximum back-end debt to income ratio capped at 50%.
Various High Debt To Income Ratio Solutions
The DTI we discussed in the earlier paragraph is the maximum DTI allowed per federal mortgage lending guidelines. Each individual lender can have its own overlays. DTI can be greatly reduced to lower limits making borrowers with high DTIs making it more difficult to qualify for a mortgage. There is High Debt To Income Ratio Solutions where we will be discussing in this article.
High Debt To Income Ratio Solutions On Student Loans
Borrowers seeking a conventional mortgage with higher debt-to-income ratios can convert to FHA. FHA caps on DTI are maxed out at 56.9% back end. Also, for borrowers with deferred student loans, lenders will NOT let borrowers exclude student loans from DTI calculations. 1.0 % of the balance of student loan and count that towards your DTI even though student loan has been deferred for more than 12 months.
SOLUTION ON HIGH DEBT TO INCOME RATIO SOLUTIONS ON HIGH STUDENT LOAN BALANCES
Contact The Student Loans Provider:
- Use the following verbiage:
- ” I am applying for a mortgage”
- ” My LENDER needs a fully amortized monthly payment over an extended-term (normally 25 years)”
- Get a verbal and request it in writing
The monthly fully amortized monthly payment over the extended term (25 years) normally turns out to be around 0.50% of the student loan balance. This figure will be used in lieu of 1.0%.
Solutions By Paying Down Credit Cards
Paying down all of the credit cards can have a significant positive impact on DTI. Many times, high DTI problems are solved by paying off credit cards. Car payments, student loan payments, and mortgage loan payments where someone else pays. If borrowers have credit items on their name such as car payments, student loan payments, mortgage payments, and other credit items and you can prove that someone else is paying for it, they can exclude those items from the DTI calculations. For example, if borrowers have student loan payments and parents are paying for them and can provide 12 months canceled checks from parents, those payments can be excluded from DTI calculations. Same with car payments.
Examine Potential Exempt Debts
For example, if borrowers are co-signer for a son or daughter’s car loan and son or daughter can provide with 12 months canceled checks that the son or daughter has been paying on the car loan, that car payment can be excluded from DTI qualifications. A car payment is huge and oftentimes, due to car payments, borrowers have an outrageous debt to income ratio. An average car payment is $400.00 which is equivalent to an $80,000 mortgage loan. The reason car payments have so much impact on debt to income ratios is that the term of the car payment note is only 3 to 5 years. Mortgages are amortized over 30 years.
Home Buyers intending on purchasing a home in the near future and need a new car, I would strongly advise delaying car purchase until they closed on a new home.
Adding Non-Occupant Co-Borrowers
- FHA loan programs allow for the home mortgage loan borrower to add a non-occupant co-borrower to qualify for DTI qualifications
- Conventional loans also allow for non-occupant co-borrowers
- Only the spouse can be a co-borrower on VA loans
- VA and USDA loans do not allow for non-occupant co-borrowers
- Non-occupant co-borrowers on FHA loans need to be family members or those that are related to the borrower by blood, law, or marriage if the main borrower only wants to put a 3.5% down payment on a home purchase
- HUD, the parent of FHA, allow non-occupant co-borrowers who are not related to the main borrower
- However, if the non-occupant co-borrower is not related to the main borrower, you need to put a 25% down payment versus a 3.5% down payment on FHA loans
Fannie Mae and Freddie Mac do not require non-occupant co-borrowers to be related to the main borrower on conventional loans.
Solutions By Buying Down Rates With Discount Points
Buying down mortgage rates:
- Another option to solve high debt to income ratios is by buying down mortgage rates
- There are cases where I had to buy down the current mortgage rate of 4.25% to a 3.5% mortgage rate in order to qualify a borrower
- Buying down rates this much can be very costly
- Borrowers intending on buying down mortgage rates to this extreme, get the maximum sellers concession towards closing costs
Borrowers can use sellers’ concessions towards buying down mortgage rates.
Other Options And Solutions For Borrowers With High Debt To Income Ratios
Choose ARM versus fixed rate for rate reduction:
- Another solution in solving high debt to income ratios is to choose an adjustable-rate mortgage
- ARM, loan product
- ARM’s have normally lower mortgage rates than 30 year fixed rate mortgage products
Get car loan out of borrowers name:
- As mentioned earlier, a car payment can be a deal-breaker
- This is because most car payments are $400.00 and this can send the DTI through the roof
- If possible pay off the car loan, refinance the car loan
- Trade-in the car for a new car and extend the car payment loan for a longer term where monthly car payment loan gets reduced
- Or get the car payment refinanced under some else’s name like wife or family member
Caution To Those With High Debt To Income Ratios
Just because borrower barely qualifies for a mortgage with high to income ratios does not mean that they are home-free. Buyers are home-free as long as there are no added expenses and DTI will remain the same until the mortgage closes. Any additional expense on monthly debt obligations can be a deal-breaker. For example, if the debt to income ratio is at 56.9% and has an approve/eligible per DU FINDINGS, even an additional $10.00 monthly payment can be a cause of a mortgage denial.
Give Extra Room When Calculating Expenses In The Event Third Party Expenses Are Higher Than Estimated
Typical cases where case scenarios like these become problems are when the homeowner’s insurance was quoted at one price and then prior to closing, the homeowner insurance comes out to be higher. A higher than expected cost can be a major risk factor in those mortgage loan borrowers with high debt to income ratios. Home Buyers who need to qualify for a mortgage with a national mortgage company licensed in multiple states with no lender overlays can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] We have no lender overlays on FHA, VA, USDA, and Conventional Loans. Gustan Cho Associates are also correspondent lenders on non-QM loans and bank statement loans for self-employed borrowers.