Importance Of Debt To Income Ratio When Qualifying For Mortgages

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Importance Of Debt To Income Ratio When Qualifying For Mortgages

This BLOG On The Importance Of Debt To Income Ratio When Qualifying For Mortgages Was UPDATED On August 29th, 2018

Importance Of Debt To Income Ratio

Home buyers 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 score 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 home purchase, but with no income to document or very little income, they cannot qualify for a home loan
  • All mortgage loan programs have debt to income ratio limits
  • 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 maximum FHA debt to income ratio requirements is 43% DTI to get an approve/eligible per automated underwriting system
  • Fannie Mae requires debt to income ratios up to 50% DTI on conventional loans

Borrowers applying for mortgage loan think that the credit scores is 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 measures the ability of borrowers to make timely payments on their home loan by analyzing the borrower’s debt to income ratio.

  • The debt to income ratio of a mortgage loan applicant 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

Qualified Income Required 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, paycheck counts a documented income since 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

Mortgage underwriters will require two years 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 is one of the biggest problems borrowers face when qualifying for home loans. FHA is the most popular loan program in the United States. However, under HUD 4000.1 FHA Handbook Guidelines, FHA does not permit Income Based Repayment (IBR) on student loans. Fannie Mac and Freddie Mac does allow IBR payments that report on consumer credit reports. Borrowers with high balances on their student loans may need to have their loan officers opt in qualifying for conventional versus FHA Loans.

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