Debt To Income Ratios
Debt to income ratios is one of the most important factors when it comes to qualifying for a residential mortgage loan. Debt to income ratios are when you take the sum of your total minimum monthly payments and divide it by your gross monthly income. Those mortgage loan applicants with high debt to income ratios, most likely have to go with FHA loans instead of conventional loans because FHA loans are more lenient with high debt to income ratios. Conventional loans normally cap the debt to income ratios at 45% DTI. FHA loans are much more generous when it comes to debt to income ratios and is capped at 56.9%. FHA front end debt to income ratios are capped at 46.9%. Your mortgage lender should really qualify you to see whether you meet the maximum debt to income ratio threshold initially when he or she takes your mortgage application. Just supplying your 2 years W-2s and/or most recent paycheck stubs is not enough and does not warrant full income qualification. Your two years tax returns should be carefully reviewed to see if there are deductions that can affect your debt to income ratios. Other factors such alimony, child support, or scheduled payment plans to the IRS, collectors, or other creditors needs to be taken into account as well.
High Debt To Income Ratios
If you have higher debt to income ratios and barely qualify for a mortgage loan, you need to realize that the closing on your mortgage loan can be risky. If you are at the maximum 56.9% debt to income ratio cap when you get qualified, you need to realize any penny of monthly increase of your debt payment can risk your mortgage loan. For example, if your homeowners insurance monthly payment is more than the payment used to qualify you initially that can push you over the maximum debt to income ratio caps. If you did not realize that you needed flood insurance but flood insurance is required, this can be a deal killer. If your property taxes are more than it was originally stated, it can be a deal killer. If your homeowners association dues are higher than originally quoted, again, it can be a deal breaker.
Solutions For High Debt To Income Ratios
There are many instances where the mortgage loan applicant qualified initially and met the debt to income ratio requirements but due to added monthly expenses and/or reduction of income due to a verification of employment or due to the writeoffs, they no longer meet the debt to income ratio requirements. Some solutions to lower the debt to income ratios are the following:
1. Adding a non-occupant co-borrower. The Federal Housing Administration allows for FHA mortgage loan borrowers to add a family member and/or relatives as non-occupant co-borrowers. Non-occupant co-borrowers will be added to the mortgage loan but not on title. Non-occupant co-borrowers need to be related to the mortgage loan borrower by blood, marriage, and/or law.
2. Buying down the mortgage rate can greatly reduce the monthly mortgage payments and this can be a potential creative solution to solve the high debt to income ratio problem. This is done by paying points for a reduced rates. If you plan on buying down your rates, you should get a steep sellers concession towards a buyers closing costs. You can use sellers concessions to buy down rates. FHA allows a maximum of 6% sellers concession towards a buyers closing costs and Conventional loans allows up to a maximum of 3% sellers concession towards a buyers closing costs.
3. Paying down or paying off revolving credit accounts can be another solution to reduce the debt to income ratios. Also, any installment debt such as car loans, alimony, child support payments that are 10 months or less can be discounted and not counted towards calculating debt to income ratios.