High Debt To Income Ratios
You can have great income, great credit, but if you have too many monthly debt obligations then you may have a problem qualifying for a residential mortgage loan due to high debt to income ratios. Many mortgage loan borrowers who have high debt to income ratios can still get a residential mortgage loan but need to correct their debt to income ratios to meet the maximum debt to income ratios permitted for conventional loans and/or FHA loan programs. Conventional loan programs have tigher debt to income ratio requirements. Most conventional lenders do have debt to income ratio overlays. Those conventional mortgage lenders who do not have conventional lender overlays will go off Fannie Mae’s Automated Underwriting System and/or Freddie Mac’s Automated Underwriting System’s automated findings. Normally the maximum debt to income ratios permitted by automated findings is 45% debt to income ratios. There are cases where automated findings will allow up to 50% debt to income ratios if the borrower has strong credit and assets as well as reserves.
FHA Loans Versus Conventional Loans
FHA has much lenier debt to income ratios requirements. FHA allows a maximum front end debt to income ratio of 46.9% and back end debt to income ratios of 56.9%. The front end debt to income ratios are the total housing payment which includes principal, interest, taxes, insurance, HOA divided by the borrower’s total monthly gross income. The back end debt to income ratios are the housing payment plus all other minimum debt payments such as minimum credit card payments, minimum student loan payments, minimum automobile payments, and any other minimum monthly payments divided by the borrower’s gross monthly income.
Conventional Loan To FHA Loan
If a mortgage loan borrower has excellent credit but has high debt to income ratios, one option may be not to go with a conventional loan but rather go with a FHA loan due to the more lax debt to income ratio requirements from FHA. One of the major disadvantages of going with a FHA loan is the upfront and annual mortgage insurance premium that FHA requires. The upfront mortgage insurance premium is 1.75% of the total mortgage loan amount which can be rolled in the balance of the mortgage loan. The annual mortgage insurance premium of 1.35% is escrowed and is paid monthly along with the borrower’s principal, interest, taxes, and homeowners insurance. FHA loan programs are only for owner occupant properties and do not apply for second homes, vacation homes, and investment homes. If the borrower has extremely high debt to income ratios and very little income, then with a FHA loan, you can have a non-occupant co-borrower as long as the co-borrower is a family member and/or relative of the borrower. There are mortgage lenders that will allow non-occupant co-borrowers who are close friends of the borrower and have known the borrower for at least five years.
Installment Loans Under 10 Months
If you have a car loan and/or other installment loans that are under 10 months, many mortgage lenders will allow you to exempt that payment from your debt to income ratio calculations. However, automobile leases do not apply because mortgage lenders view that once your automobile lease is up, mortgage lenders view that you will get another automobile lease to replace the old automobile lease.
If you have an automobile payment or other installment loan and someone else is paying for that installment loan, you many be able to exempt that payment in calculating your debt to income ratios as long as you can provide proof that someone else is paying for that monthly payment. You need to provide 12 months of cancelled checks from the person that is paying that monthly payments. This is common when a parent pays a student loan payment for the mortgage loan borrower. The parent needs to provide 12 months cancelled checks to the mortgage loan underwriter and the student loan payment is not used towards the calculation of the debt to income ratios.
FHA allows deferred student loan payments to be exempted from debt to income ratio qualifications as long as the deferment is at least 12 months. However, conventional loan programs do not allow this.
Paying Down Credit Cards And Paying Off Other Debts
Paying down high balance credit cards or paying off credit accounts are ways of solving high debt to income ratios. Many times when a mortgage loan applicant does not qualify due to high debt to income ratios, just zeroing out the minimum monthly payments on revolving accounts can solve the problem. Other solutions for solving high debt to income ratios can be paying off an installment loan. For example, if you have a car payment that has a $4,000 balance and your minimum monthly payments are $300.00, paying off the $4,000 balance of your automobile loan will wipe out the $300 monthly minimum car payment off your debt to income qualification.