Home Loan With High Debt To Income Ratios Mortgage Guidelines

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Home Loan With High Debt To Income Ratios Mortgage Guidelines

This BLOG On Home Loan With High Debt To Income Ratios Mortgage Guidelines Was Written By Michael Gracz of Gustan Cho Associates

Debt to income ratios are extremely important when it comes to mortgage qualification requirements.

  • Every loan program has its maximum debt to income ratio caps
  • The most generous loan program when it comes to debt to income ratios are FHA Loans
  • FHA lending guidelines has a maximum back end debt to income ratio cap of 46.9% front end and 56.9% back end to get an approve/eligible per automated underwriting system
  • FHA also has a maximum front end debt to income ratio 46.9%
  • Conventional loans have a maximum debt to income ratio cap of 50%
  • USDA Loans has a maximum debt to income ratio cap of 29% front end and back end of 41%
  • VA Loans debt to income ratios are a little different
  • Depends on the individual VA Loan applicant
  • I have seen an approve/eligible on VA Loans with debt to income ratios up to 60% DTI
  • Have seen VA Loan applicant’s get a referred/eligible with a 45% debt to income ratio
  • Department of Veterans Affairs does not have any minimum credit score requirements nor debt to income ratio caps
  • It depends on how the overall credit and income profile of the VA applicant and how the Automated Underwriting System analyzes it
  • With Jumbo Mortgages, most lenders require no greater than 40% debt to income ratios
  • Gustan Cho Associates has non-qm jumbo mortgages with credit scores down to 620 and debt to income ratios up to 50%
  • Gustan Cho Associates offers bank statement mortgage loans for self employed borrowers where no income tax returns are required

What Is Debt To Income Ratios?

Debt to income ratios is adding the amount of the mortgage loan borrower’s total monthly minimum payments and dividing it by the borrower’s gross monthly income.

  • There are two types of debt to income ratios
  • The front end debt to income ratio and the back end debt to income ratio
  • The front end debt to income ratio is the housing payment divided by the mortgage loan borrower’s gross monthly income
  • The housing payment consists of the principal, interest, taxes, and insurance
  • Also, if the property has homeowners association dues, the HOA is included as part of the housing payment and is calculated in the calculation of the front end debt to income ratios
  • The back end debt to income ratios consists of the housing payment plus all other monthly minimum payments such as the following:
    • minimum credit card payments
    • auto loans
    • student loans
    • installment loans
    • other monthly minimum payments that is being reported to the three credit reporting agencies also called credit bureaus
    • Monthly credit obligations that do not report to the credit bureaus such as insurance payments, cell phone payments, telephone payments, cable payments, and utilities are not used to calculate debt to income ratios by mortgage underwriters

Risks With Home Loan With High Debt To Income Ratios

If you are seeking a home loan with high debt to income ratios, you are at risk for going over the debt to income ratio caps and any larger monthly payments may jeopardize on a last minute mortgage loan denial.

  • For example, here is a case scenario:
    • if home buyer got homeowners insurance quote of $100 per month initially
    • back end debt to income ratio is at 56.9% on a FHA Loan
    • a revised increase of homeowners insurance quote of $120.00 per month from the insurance company will throw debt to income ratio caps and will disqualify borrower for loan closing
  • Home buyers with extremely high debt to income ratios need to make sure that they run a risk of not closing their mortgage loan if they exceed the maximum debt to income ratio caps allowed

Solutions With Home Loan With High Debt To Income Ratios

Borrowers with high debt to income ratios, my recommendation is to make sure to pay off all credit card balances prior to officially applying for a home loan.

  • Borrowers forced to pay off credit card balances during the mortgage process due to higher debt to income ratios, the lender will have borrowers pay off credit card balances PLUS CLOSE OUT CREDIT CARD ACCOUNT under Fannie Mae Guidelines
  • If paying credit card balances prior to applying for a mortgage loan, borrowers will not need to close out credit card accounts in the event they need to pay off credit card balance due to exceeding the debt to income ratio caps
  • Freddie Mac will allow borrowers to pay outstanding balances on credit cards during mortgage process without having borrowers to close out the accounts
  • However, most lenders prefer Fannie Mac versus Freddie Mac

Buying Down Rates As Solution To Home Loan With High Debt To Income Ratios

Lenders do allow sellers to give home buyers sellers concession toward a home buyer’s closing costs.

  • Sellers concessions can be used to buy down mortgage rates by home buyers
  • Home buyers with high debt to income ratios or nearing the maximum cap on their debt to income ratios may want to get extra sellers concessions
  • They can use the sellers concession to buy down mortgage rates and for any other closing costs

Another option for mortgage loan borrowers who exceed the debt to income ratio caps during the mortgage application and mortgage approval process is to explore going with an adjustable rate mortgages instead of a 30 year fixed rate mortgage. Adjustable rate mortgages offer much lower mortgage rates than fixed rate mortgages.

Home buyers looking for a home loan or homeowner looking for a refinance mortgage with high debt to income ratios, please contact Mike Gracz at Gustan Cho Associates at 630-659-7644 or email us at mgracz@gustancho.com. We will explore the best option and mortgage loan program to suit your needs. We are available 7 days a week, including evenings and holidays.

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