Tips On High Debt To Income Ratio Solutions To Qualify For Mortgage

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Tips On High Debt To Income Ratio Solutions To Qualify For Mortgage

This BLOG On Tips On High Debt To Income Ratio Solutions To Qualify For Mortgage Was UPDATED On March 3rd, 2018

Debt to income ratio is a determinant in mortgage qualification and mortgage approval process. There are many high debt to income ratio solutions borrowers can take to qualify for mortgage.

  • Mortgage lenders put a lot of weight in debt to income ratio
  • 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
    • FHA
    • USDA
    • VA guidelines
  • Mortgage loan application will not qualify and will not close

Before a mortgage application gets submitted to the underwriting department, loan officer and processor should make sure that the mortgage borrower’s debt to income ratio is in line within the required debt to income ratio parameters required.

What Is Debt To Income Ratio?

There is two types of debt to income ratios when it comes to the mortgage application process.

  • The front end debt to income ratio is the
    • principal
    • interest
    • taxes
    • insurance
  • 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:
    • principal
    • interest
    • taxes
    • insurance
  • As well as all other monthly minimum debt payments of the the mortgage loan borrower such as minimum credit card payments
    • 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 debt to income caps at 50% back end debt to income ratio caps
  • FHA loans front end debt to income ratio caps is 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 capped at 60% debt to income ratio
  • USDA Loans DTI are capped at 41%
  • Condotel and Non-Warrantable Condo Loans have debt to income ratio caps at 43% back end debt to income ratio caps

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 their own overlays
  • DTI can be greatly reduced to lower limits making those borrower’s with high DTIs making more difficult to qualify for a mortgage
  • There are High Debt To Income Ratio Solutions

High Debt To Income Ratio Solutions On Student Loans

  • Borrowers seeking a conventional mortgage with higher debt to income ratios can can convert to FHA. 
    • FHA caps on DTI is maxed out at 56.9% back end
    • Also, 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 Student Loans Provider
  • Use this verbiage: 
    • ” I am applying for mortgage”
    • ” My LENDER needs a fully amortize 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 the 1.0%.

High Debt To Income Ratio Solutions By Paying Down Credit Cards

  • Paying down all of 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 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 has student loan payments and parents are paying for them and can provide 12 months cancelled checks from parents, those payments can be excluded from DTI calculations
    • Same with car payments
      • For example, if borrowers are a co-signer for son or daughter’s car loan and son or daughter can provide with 12 months cancelled checks that 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 often times, due to car payments, borrowers have outrageous debt to income ratios
      • An average car payment is $400.00 which is equivalent to a $80,000 mortgage loan
      • The reason car payments have so much impact on debt to income ratios is because 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 to delay car purchase until they closed on new home.
  • Non-occupant co-borrower: 
    • FHA loan programs allow for the home mortgage loan borrower to add a non-occupant co-borrower to qualify for DTI qualifications
    • Conventional loans and other loan programs do not allow for non-occupant co-borrowers
    • Non-occupant co-borrowers need to be family members or those that are related to the borrower by blood, law, or marriage

High Debt To Income Solutions On Buying Down Rates

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
  • 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 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 qualify 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 mortgage closes. 
  • Any additional expense on monthly debt obligations can be a deal breaker
  • For example, if debt to income ratio is at 56.9% and have an approve eligible per DU FINDINGS, even an additional $10.00 monthly payment can be a cause of a mortgage denial
  • Typical cases where case scenarios like these become problems is when the homeowners 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 mortgage with a national direct lender with no mortgage overlays can contact us at The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com. We have no lender overlays on FHA, VA, USDA, and Conventional Loans. We are also correspondent lenders on non-qm loans and bank statement loans for self employed borrowers.

Gustan Cho

www.gustancho.com

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