This BLOG On How Underwriters View Liabilities In Mortgage Qualification Was UPDATED And PUBLISHED On March 10th, 2020
Income and Liabilities In Mortgage Qualification are the two most important factors when lenders qualify borrowers. Borrowers can have high verified income, but if they have many liabilities in mortgage qualification, they may not qualify by themselves. Every mortgage loan program has debt to income ratio requirements.
How Are Debt To Income Ratios Calculated
Here is how debt to income ratios are calculated by lenders:
- Taking the total monthly minimum payments of borrowers which includes the proposed P.I.T.I. of the new home purchase
- Dividing it by the borrower’s monthly gross income
That percentage derived by dividing the total monthly borrower’s monthly payments by the borrowers month gross income is the debt to income ratio.
Types Of Liabilities In Mortgage Qualification
Mortgage Underwriters only count liabilities that reports on credit bureaus as well as other debts that borrowers are obligated by court order. Utilities, cell phone bills, personal insurance bills, food and clothing, and other non-credit reporting liabilities are not included in the calculation of debt to income ratios.
The two of the biggest liabilities in mortgage qualification that most home buyers face are the following:
- Student Loans
- Car Payments
Deferred Student Loans
Deferred Student Loans and Car Payments are the two biggest liabilities in mortgage qualification. Deferred student loans that have been deferred for more than 12 months are no longer exempt from FHA Loans and Conventional Loans. Conventional Loans allows IBR Payments reporting on credit reports. VA Loans does exempt deferred student loans that have been deferred for 12 or more months. Income-Based Repayment (IBR) does not count either. Borrowers with high student loan balances need to do the following on FHA Loans:
- Contact their student loan provider
- Tell them that they are applying for a mortgage and that their lender is requiring a written fully monthly amortized payment over an extended payment plan (normally 25 years)
- This amount should be about 0.50% of the student loan balance
Getting this fully amortized monthly payment over an extended payment plan is crucial for those with higher student loan balances. Otherwise, lenders will use 1.0% of the outstanding student loan balance on FHA Loans. Fannie Mae and Freddie Mac allow IBR Payments on conventional loans.
Car Payments And Mortgage Qualification
Another common problem home buyers with higher debt to income ratios will encounter is not qualifying due to car payments.
- Average auto monthly payments are $400 per month
- This $400 per month is equivalent to an $80,000 mortgage
- Reason monthly car payments are so high is due to having shorter amortization schedules
- Homebuyers intending in buying a home in the near future should avoid buying a new auto until after they purchase and close on their home loans
Alimony And Child Support Payments are viewed by mortgage underwriters as liabilities.
Contingent Liabilities In Mortgage Qualification exists when mortgage borrowers hold a joint obligation with another person.
- Examples include where the borrower is a co-applicant and/or co-signer
- The co-signer must be listed on the borrower’s debt unless the borrower can provide proof and documentation that the debt holder has no financial responsibility of the debt
- Proof that there is not a possibility that the creditor will not go after the co-signer in the event if the debt goes bad needs to be provided
- Exclusions include if the co-signer can provide proof that the main borrower has been making payments in the past 12 months
- Proof includes 12 month’s canceled checks and/or bank statements of the main account holder
All payments from the main account holder need to have been on time for the past 12 months.
Mortgage Debt Obligations
In the event, if the borrower has been obligated on an existing outstanding home loan that is secured by a property which has been sold by assumption, the following applies:
Contract for deed or traded within the past twelve months without the liability being release and/or the property has been transferred out due to divorce. contingent liabilities in mortgage qualification needs to be factored in unless the following:
- Zero 30 day late payments in the past 12 months
- A home appraisal or closing statement from the sale of the property supports a value that is 75% or less loan to value
- The outstanding mortgage loan balance less any upfront mortgage insurance premium cannot exceed 75% of the home appraised value and/or sale price
Copy of divorce decree ordering the separated spouse to make mortgage payments and/or assumption agreement and the deed that shows the transfer of title to the property out of the borrowers’ name is required.
Installment Debt Obligations
If borrowers have debt payments that are less than 10 months remaining for payoff balance, that debt may be excluded from debt to income ratio calculations.
- Mortgage underwriters may include those debts if the borrower’s credit file is weak with no reserves or the underwriter sees that the debt payment may affect new homeowners’ ability to pay new mortgage (P.I.T.I.).
- Installment debt may not be paid down to 10 months remaining in order to qualify for a mortgage.
Lease Payments As Liabilities In Mortgage Qualification
Automobile monthly lease payments need to be included for DTI calculations even though the payments are less than 10 months. Lenders do not exempt car leases because they assume once a borrower’s auto lease is up, they will lease another auto.
Revolving Debt As Liabilities In Mortgage Qualification
Revolving monthly debt needs to be included in debt to income ratio calculations. Lenders do not accept revolving debt pay down to qualify for a mortgage by borrowers. Paying down debts on credit cards and other revolving debts needs to be done prior to submission of mortgage loan application. Borrowers who are looking for a direct lender with no lender overlays on government and conventional loans and no overlays on debt to income ratios, please contact us at 262-716-8151 or text us for faster response. Or email us at email@example.com. We are available 7 days a week, evenings, weekends, and holidays.