How Underwriters Calculate Debt To Income Ratio

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How Underwriters Calculate Debt To Income Ratio

This BLOG On How Underwriters Calculate Debt To Income Ratio Was UPDATED On October 12th, 2018

There are certain ways on How Underwriters Calculate Debt To Income Ratio. Borrowers debt to income ratio is one of the most important factors when it comes to a mortgage approval.

  • Debt to income ratios are the sum of all monthly obligations divided by borrowers monthly gross income
  • The lower the debt to income ratio, the stronger the consumer financial profile is
  • There are maximum debt to income ratio requirements for FHA loans and Conventional loans
  • For conventional mortgage loans, the maximum debt to income ratio is normally capped at 50%
  • For FHA loans, the maximum debt to income ratios are capped at 46.9% front end and 56.9% back end to get an automated underwriting system approval
  • Having a low debt to income ratio is considered a compensating factor
  • When it comes to mortgage income qualification, the less monthly credit obligation borrowers  have the better the chances are for a residential mortgage loan approval
  • There are monthly debts that borrowers can eliminate for monthly income qualification where the monthly credit payments can not be counted

How Underwriters Calculate Debt To Income Ratio On Payments That Can Be Eliminated

Those who are a co-signer for a loan, that monthly payment that is reflected on credit report can be eliminated in monthly income qualification if, and only if, they have proof that they are not making that payment.

  • For example, here is a case scenario:
    • those who have co-signed for a friend or family member on a vehicle
    • and can provide cancelled checks from the prior 12 months from the friend or family member
    • that monthly payment can be eliminated from the month income qualification from mortgage application
  • Another example is those with student loans:
    • If parents are paying the student loan payments
    • and can provide 12 months cancelled checks from for the payments
    • those monthly payments will not be counted towards the monthly income qualification on mortgage DTI calculations
  • By eliminating these payments that they are not paying on will lower debt to income ratios and enable them to qualify for a mortgage loan that would have otherwise not qualified for

Deferred Student Loans On How Underwriters Calculate Debt To Income Ratio

The Federal Housing Administration (FHA) no longer allows deferred student loans that have been deferred for 12 or more months to be exempt from debt to income calculations. Income Based Repayment (IBR) monthly payments do not count on FHA Loans but is allowed on Conventional Loans:

Conventional, FHA, USDA Borrowers with outstanding students loan here is How Underwriters Calculate Debt To Income Ratio :

  • 1% of the outstanding student loan balance will be used as a monthly debt in calculating debt to income ratios
  • Or they can contact their student loan provider and tell them that they are applying for mortgage and need a fully amortized monthly payment amount over an extended payment term (normally 25 years)
  • This fully amortized monthly payment amount turns out to be approximately 0.50% of the student loan balance

With VA Loans, deferred student loans that has been deferred for more than 12 months are exempt from debt to income calculations.

Installment Loans Under 10 Months Left

Borrowers with installment debt that has less than 10 months left, the monthly debts can be excluded from debt to income calculations.

  • This is especially common for automobile loans where if final payoff is 10 months or less, that payment will not be used in DTI Calculations
  • This does not apply for automobile leases and only automobile purchase loans

Lender Overlays On Debt To Income Ratios

Most lenders have overlays on debt to income ratios.

  • For example, the maximum DTI allowed per FHA Guidelines to get an approve/eligible per Automated Underwriting System (AUS) is 46.9% front end and 56.9% back end DTI
  • However, most banks and mortgage companies will cap debt to income ratio at 45% to 50% as part of their lender overlays

Borrowers who need to qualify with a direct lender with no overlays on government and conventional loans, please contact Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays.

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