How Mortgage Underwriters Calculate Debt To Income Ratio

How Mortgage Underwriters Calculate Debt To Income Ratio

This BLOG On How Mortgage Underwriters Calculate Debt To Income Ratio Was UPDATED On January 17th, 2018

There are two types of debt to income ratios when it comes to debt to ratio requirements.

  • The first is front end debt to income ratios and the second is back end debt to income ratios
  • The front end debt to income ratios is also known as the housing expenses debt to income ratios which is the sum of the mortgage interest and principal payments, monthly property taxes, mortgage insurance premium, homeowners insurance, and homeowners association dues, if any divided by the borrower’s gross monthly income

Automated Underwriting System Approval

To get an automated approval by the Automated Underwriting System for FHA Loans, the front end debt to income ratio cannot exceed 46.9% and the back end DTI cannot exceed 56.9%. The maximum DTI on Conventional Loans for an approve/eligible per AUS is 50%. VA Loans does not have a maximum debt to income ratio requirement. I have gotten approve/eligible per AUS on VA Loans with 580 credit scores and 60% DTI.

  • Monthly utility payments such as the following:
    • Cable bills
    • Internet bills
    • Water bills
    • Other bills
  • The above types of bills that are not reporting on credit bureaus are not included in qualifying for the front end debt to income ratios
  • The back end debt to income ratios are the sum of the total housing payment plus all other monthly payments such as automobile payments, credit card payments, student loan payments, and other monthly minimum credit payments divided by the borrower’s gross monthly income

Importance Of Debt To Income Ratios And How Mortgage Underwriters Calculate Debt To Income Ratio

To get an automated approval per the Automated Underwriting System on FHA Loans, maximum back end debt to income ratios cannot exceed 56.9%.

  • However, there is a big difference between what mortgage loan qualify for and what homeowners can comfortably afford
  • Mortgage underwriters do not take other bills that do not report on credit report as part of borrowers DTI
  • Borrowers expenses such as the following is not taken into account on How Mortgage Underwriters Calculate Debt To Income Ratio:
    • Auto insurance
    • Utilities
    • Landscaping
    • Snow Plowing
    • Child Care
    • Elderly Care
    • Children’s Extra Curricular Activities
    • Breakdowns and Maintenance

Do not be in a situation where as a homeowner being house rich and cash poor.

Qualifying How Mortgage Underwriters Calculate Debt To Income Ratio Versus Affording New Housing Expenses

A mortgage lender will qualify borrowers for the maximum monthly mortgage payment they qualify for under income and credit profile they have on hand.

  • However, can a new homeowner afford the monthly mortgage payment the mortgage lender qualifies them for? 
  • Remember that mortgage lender is not taking into account the full monthly mortgage payment of housing expenses such as the following:
    • Water bills
    • Electric bills
    • Gas bills
    • Internet bills
    • Cable bills
    • Landscaping bills
    • Other monthly maintenance bills
  • Homeowners also need to consider other monthly expenses such as entertainment, groceries, children’s extra curricular activity expenses, and other expenses that mortgage lenders did not use
  • Home ownership is the American Dream and the purpose of being a homeowner is to enjoy it and make life comfortable for them and their families
  • This will not be the case if you have to spend every extra dollar into paying your home’s monthly mortgage payment

Mortgage Payment: Need To Consider Reserves

Homeowners also are responsible for maintenance and repairs for their own homes.

  • Mortgage lenders do not make reserves as a mandatory requirement but unexpected repairs do come up and some of these repairs can be extremely costly
  • We are currently experiencing severe weather in the Midwest and East Coast where temperatures are at sub zero
  • Many homeowners are experiencing plumbing issues and heating issues
  • If furnace goes out, costs can be very high, sometimes more than a thousand dollars
  • Frozen pipes bursting is another issue homeowners are going through right now due to the extreme severe weather
  • Some homeowners need to shell out several thousand dollars to correct these repairs
  • These repairs are not covered by homeowners insurance

Debts Reporting On Credit Report Versus Personal Debts Of Borrowers

How Mortgage Underwriters Calculate Debt To Income Ratio only includes debts that borrowers have reporting on credit report.

  • The way on How Mortgage Underwriters Calculate Debt To Income Ratio with regards to income is underwriters take into account gross income and not net income
  • There are many times where borrowers get approved for mortgage loans where they cannot afford
  • With the excitement of buying a new home and moving in to a new neighborhood, many home buyers do not take into account that buying a new home also comes with the expenses of being a property owner
  • Things do break and many mechanical items such as furnaces, refrigerators, and freezers can cost thousands of dollars
  • My refrigerator just broke and needs to be replaced
  • A good new refrigerator can cost $5,000

Reserves For Homeowners

Reserves for homeowners is not a lender requirement.

Homeowners should set aside a separate reserve fund in cases of emergency.

  • Homeowners need to consider that just because they qualify for a mortgage loan does not mean they can comfortably afford it
  • Affordability is homeowners call and no mortgage lender can tell them whether they can afford it or not
  • They will just qualify borrowers for the mortgage loan they request for and see if they meet the mortgage lender’s underwriting guidelines on debt to income ratio
  • Please consider overall finances including reserves before accepting loan commitment and go through mortgage loan to see whether mortgage payment will not be stressing household monthly budget

Overlays On DTI By Lenders

Most lenders will have mortgage overlays on debt to income ratios where they will cap it at 45% to 50% on FHA Loans. However, FHA Guidelines on DTI is 46.9% front end and 56.9% back end to get an approve/eligible per AUS on FHA Loans. Borrowers who need to qualify for FHA Loans with a direct lender with no 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 are available 7 days a week, evenings, weekends, and holidays.

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