Qualifying For Mortgages

Importance Of Debt To Income Ratio When Qualifying For Mortgages

Gustan Cho Associates are mortgage brokers licensed in 48 states

This Article Is About The Importance Of Debt To Income Ratio When Qualifying For Mortgages

Mortgage borrowers have to realize the importance of debt to income ratio when qualifying for a mortgage loan. Every loan program has its own agency guidelines when it comes to debt to income ratio. Most mortgage companies have lender overlays on caps on debt to income ratio on FHA, VA, USDA, and conventional loans. Lender overlays are additional lending requirements by mortgage companies that surpass and are higher than the minimum agency guidelines of HUD, VA, USDA, Fannie Mae, Freddie Mac.

FHA Loan Requirements On Debt To Income Ratios On FHA Loans

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FHA loans are the best loan programs for homebuyers with high debt-to-income ratios. FHA loans have substantially higher debt-to-income caps versus conventional loans.

For example, HUD, the parent of FHA, has the maximum front-end debt to income ratio of 46.9% and 56.9% back-end debt to income ratio cap to get an approve/eligible per automated underwriting system. However, most lenders lower the debt to income ratio caps to 31% front-end and 43% back-end on FHA loans as part of their lender overlays.

HUD Mortgage Guidelines On FHA Manual Underwriting On FHA Loans

HUD Agency Mortgage Guidelines allow manual underwriting on FHA loans. FHA manual underwriting is the same as automated underwriting system FHA loans with the exception of manually underwritten FHA loans that have lower debt to income ratio restrictions. The only difference in manual underwriting on FHA loans is the debt to income ratio caps are dependent on compensating factors.

Here is the HUD manual underwriting debt to income ratio requirements on FHA loans.

  • 31% front-end and 43% back-end with zero compensating factors
  • 37% front-end and 47% back-end with one compensating factors
  • 40% front-end and 50% back-end with two compensating factors

Mortgage underwriters have a lot of underwriter discretion on manual underwrites. The debt-to-income ratios above can be higher if the underwriter feels the borrower has strong compensating factors.

VA Loan Requirements On Debt To Income Ratios ON VA Loans

The Veterans Administration has no maximum debt to income ratio caps on VA loans as long as borrowers can get an approve/eligible per automated underwriting system. However, most lenders have maximum caps on debt to income ratios on VA loans of 41% or 45% DTI. This is why it is important to fully understand the debt to income ratio agency mortgage guidelines on government and/or conventional loans. If you get denied for a mortgage due to having a high debt to income ratio but meet the agency mortgage loan guidelines on the loan program you are applying for, you can go to a different lender with no lender overlays on DTI and apply there. Gustan Cho Associates has no lender overlays on debt to income ratio on government and conventional loans.

VA Loan Requirements On Manual Underwriting On VA Loans

VA Agency Mortgage Guidelines allow manual underwriting on VA mortgage loans. VA manual underwriting is the same as automated underwriting system VA home loans with the exception of manually underwritten VA loans that has debt to income ratio restrictions. AUS-approved VA loans do not have a maximum debt to income ratio caps. The only difference in manual underwriting on VA loans is the debt to income ratio caps are dependent on compensating factors.

Here is the VA manual underwriting debt to income ratio requirements on VA mortgages:

  • 31% front-end and 43% back-end with zero compensating factors
  • 37% front-end and 47% back-end with one compensating factors
  • 40% front-end and 50% back-end with two compensating factors

Mortgage underwriters have a lot of underwriter discretion on manual underwrites of VA loans. The debt-to-income ratios above can be higher if the underwriter feels the borrower has strong compensating factors.

Understanding Debt To Income Ratio Requirements When Qualifying For A Mortgage

Debt To Income Ratio

Homebuyers should realize the importance of debt to income ratio when qualifying for a home loan. Credit and income are the two leading factors when qualifying for a mortgage loan. However, income is what determines the debt to income ratio. Borrowers can have prior bad credit and lower credit scores but as long as they have income, they will qualify for a home loan. However, on the flip side, you can have the highest credit scores in the world, have perfect payment history without a single late payment, have plenty of assets to put down on the home purchase, but with no income to document or very little income, they cannot qualify for a home loan. All mortgage loan programs have a debt to income ratio limits

In this article, we will discuss and cover the Importance Of Debt To Income Ratio When Qualifying For Mortgages.

FHA DTI Agency Mortgage Guidelines

FHA debt to income ratio requirements are the most generous out of all mortgage loan programs:

FHA Loans allow up to 56.9% DTI for borrowers with a 620 credit score or higher. For borrowers with under 620 credit scores, the automated underwriting system may cap the maximum debt to income ratio to 43% DTI to get an approve/eligible per automated underwriting system unless the borrower has strong compensating factors. Fannie Mae requires debt to income ratios up to 50% DTI on conventional loans. Borrowers applying for mortgage loans think that credit scores are the most important factor associated with getting a mortgage loan approval. More importantly than the credit scores and the down payment required on a home purchase is the debt to income ratio, also referred to as DTI.

Importance Of Debt To Income Ratio: What Is DTI?

Lenders measure the ability of borrowers to make timely payments on their home loans by analyzing the borrower’s debt to income ratio.

The debt to income ratio of a mortgage loan application is expressed as a percentage and is calculated by dividing the sum of all of the minimum monthly debt payments such as the following:

  • credit card payments
  • auto loan payments
  • student loan payments
  • installment loan payments
  • proposed P.I.T.I. ( principal, interest, taxes, insurance )
  • all other recurring monthly debt of the borrower by the borrower’s gross monthly income

That percentage is the borrower’s DTI.

What Is Considered Qualified Income By Mortgage Underwriters

When getting qualified for a home mortgage loan, debt to income ratio is the deciding factor on how much home you will qualify for:

  • Lenders will only accept documented income and cash income does not count
  • For example, a paycheck counts a documented income since the employer takes taxes out and gives employees W-2s at the end of the year
  • Cash income earned from a part-time job will not count in debt to income ratio calculations since the cash is not documented
  • Part-time income, bonus income, and overtime income can be used for qualifying income
  • However, borrowers need at least 2 years of steady part-time income, overtime income, and bonus income in order for it to count

Social security and pension can also count as qualified income in mortgage income qualification.

Importance Of Debt To Income Ratio When Underwriters Are Analyzing Qualified Income

Not all sources of income of the borrower can be used as qualified income. For example, part-time income, overtime income, and other income cannot be used unless the borrower has been getting that income for the past two years. Declining other income cannot be used as qualified income and is negated and cannot be used as qualified income. Cash income cannot be used as income in mortgage qualification.

Mortgage underwriters will require two years of tax returns from all borrowers. All unreimbursed expenses will count against gross income and the adjusted gross income will be used as qualified income. Gustan Cho Associates offers W2 Income Only Mortgages for W2 Wage Earners as long as borrowers do not have Schedule E and C Income Writeoffs on their federal income tax returns.

Income-Based Repayment On FHA Versus Conforming Loans

High student loan balances are one of the biggest problems borrowers face when qualifying for home loans. FHA loans are the most popular loan program for first-time homebuyers, borrowers with bad credit, homebuyers with credit scores down to 500 FICO, borrowers with high debt to income ratio, and homebuyers with outstanding collections and charged-off accounts. Under HUD 4000.1 FHA Handbook Guidelines, HUD now allows and permit Income-Based Repayment (IBR) on student loans. Fannie Mac and Freddie Mac also allow IBR payments reporting on consumer credit reports. Borrowers with high balances on their student loans may need to have their loan officers opt-in to qualify for FHA versus conventional loans due to HUD having a higher cap on debt to income ratios. 

If you  have any questions about the information on this blog or need to qualify for a mortgage with high debt to income ratio, please contact us at Gustan Cho Associates at 800-900-8569 or email us at gcho@gustancho.com. Text us for a faster response.

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