High Debt To Income Ratios Mortgage Lending Guidelines

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High Debt To Income Ratios Mortgage Lending Guidelines

This BLOG On High Debt To Income Ratios Mortgage Lending Guidelines Was UPDATED On August 23rd, 2018

Home Buyers can have great income, great credit, but with too many monthly debt obligations they may have issues in qualifying for mortgage due to high debt to income ratios.

  • Borrowers with high debt to income ratios can qualify for mortgage
  • Those exceeding debt to income ratio caps need to correct their debt to income ratios
  • This needs to be done to meet the maximum debt to income ratios permitted for Conventional and/or FHA Loans

Debt To Income Ratio Caps On Conventional Loans

Conventional loan programs have lower debt to income ratio requirements:

  • Most conventional lenders do have debt to income ratio overlays
  • Some lenders who do not have overlays on conventional loans 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 50% debt to income ratios
  • Fannie Mae and Freddie Mac may allow up to 50% debt to income ratios if the borrower has strong credit and assets as well as reserves
  • However, most private mortgage insurance companies will not insure any borrowers with over 45% debt to income ratios unless they have a credit score
  • Buyers putting 20% down payment should have no issues with 50% DTI since PMI is not required

FHA Loans Versus Conventional Loans

FHA has much higher debt to income ratios requirements.

  • FHA allows a maximum front end debt to income ratio of 46.9%
  • FHA back end debt to income ratios is 56.9% to get approve eligible per AUS
  • 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 the following:
    • minimum credit card payments
    • minimum student loan payments
    • minimum automobile payments
    • other minimum monthly payments divided by the borrower’s gross monthly income

Conventional Loan To FHA Loan

Borrowers with excellent credit but with high debt to income ratios, one option may be not to go with a conventional loan but rather go with a FHA loan. This is 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
  • This fee is normally rolled in the balance of the mortgage loan
  • The annual mortgage insurance premium of 0.85% is escrowed
  • It is paid monthly along with the borrower’s principal, interest, taxes, and homeowners insurance
  • FHA loan programs are only for owner occupant properties
  • Buyers cannot use FHA Loans for second homes, vacation homes, and investment homes
  • If the borrower has extremely high debt to income ratios and very little income, FHA Loans are best option
  • FHA allows multiple non-occupant co-borrowers as long as the co-borrower is a family member and/or relative of the borrower
  • There are 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

VA Home Loans With Higher Debt To Income Ratios

Most lenders have debt to income ratio requirements on VA Loans. However, the Department Of Veteran Affairs

does not have any debt to income ratio requirements nor credit score requirements on VA Loans.

  • When a lender requires a 620  or 640 credit score requirement that is not VA Guidelines
  • It is that particular lenders own credit score requirements
  • Same with debt to income ratios on VA Loans. Most lenders will require a 45% to 50% debt to income ratio requirement by veteran borrowers
  • Again, VA has no DTI caps

I recently got a VA Loan approved and closed with a 63% debt to income ratio. The Gustan Cho Team at Loan Cabin Inc. has no debt to income ratio nor credit score requirement on VA Home Loans.

Installment Loans Under 10 Months

Borrowers with car loans and/or other installment loans that are under 10 months, are exempt that payment to be calculated on debt to income ratio calculations.

  • However, automobile leases do not apply
  • Leases do not apply because lenders view that once automobile lease is consumers will get another automobile lease to replace the old automobile lease
  • Borrowers with an automobile payment or other installment loan with someone else paying may be able to exempt that payment in calculating debt to income ratios
  • This can be done as long as they can provide proof that someone else is paying for that monthly payment
  • 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 
  • The parent needs to provide 12 months cancelled checks to underwriter and the student loan payment is not used towards the calculation of the debt to income ratios

Deferred Student Loans

FHA no longer allows deferred student loan payments to be exempted from debt to income ratio qualifications.

  • Deferred Student Loans as long as the deferment is at least 12 months is no longer exempt
  • Income Based Repayment (IBR) is no longer allowed under HUD Guidelines
  • Lenders are required to use 1.0% of the outstanding student loan balance as a monthly debt in calculating deferred student loans or student loans in an IBR
  • However, there is a loophole
  • Borrowers can contact student loan provider and tell them that lender is requiring a fully amortized monthly payment over an extended term (normally 25 years)
  • This figure normally turns out to be 0.50%. Borrowers can use this figure in lieu of the 1.0% amount
  • Make sure to get this in writing by the student loan provider

VA Loans are different when it comes to deferred student loans. VA allows lenders to exempt any deferred student loans that is deferred for 12 or more months from debt to income ratio calculations.

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,
    • borrowers with a car payment that has a $4,000 balance
    • minimum monthly payments are $300.00
    • paying off the $4,000 balance of automobile loan will wipe out the $300 monthly minimum car payment off debt to income qualification

Home Buyers with higher debt to income ratios who need to qualify with direct lender with no mortgage overlays on government and/or conventional loans can contact us at The Gustan Cho Team at Loan Cabin Inc. at 262-716-8151 or email us at gcho@gustancho.com.

Gustan Cho

www.gustancho.com

2 Comments
  1. Cass says

    What if I cannot prove this because the other party does not have 12 months of statements? Can I remove my name from the car loan without reducing my credit score? The only reason I was on the loan was because it was a gift to me; however, my income or credit score did not make a difference because the buyer has higher income and credit score. Are their other alternatives?

    1. Gustan Cho, NMLS 873293 says

      You can exempt a debt from DTI calculations only if you can provide 12 months canceled checks and/or bank statements from the person paying for it. You can refinance the car loan to just have one persons name. Gustan Cho Associates at Loan Cabin can go up to 56.9% back end debt to income ratios since we have no lender overlays. You can sell your car, trade in your car, or refinance your car to just one borrower’s name. Other than that, there is no way around it from including on debt to income ratio calculations.

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