Lowering Debt To Income Ratio To Qualify For Mortgage

This BLOG On Solutions In Lowering Debt To Income Ratio To Qualify For Mortgage Was UPDATED And PUBLISHED On April 27th, 2019

Debt to income ratio is the sum of the monthly minimum payments divided by the monthly gross income of borrowers:

  • There are two types of debt to income ratios
  • Front end debt to income ratio
  • Back end debt to income ratio
  • The front end debt to income ratio is also called the housing debt to income ratio
  • Front end DTI is the principal, interest, taxes, and insurance
  • If the property has other expenses such as homeowners association dues and flood insurance, then the front end DTI is the PITI plus the HOA and Flood Insurance divided by borrowers monthly gross income 
  • The back end debt to income ratio is the housing expenses plus any other monthly expenses divided by the borrower’s gross monthly income

The maximum front end debt to income ratio allowed by HUD on FHA Loans is 46.9% to get AUS Approval on AUS.  The maximum back end debt to income ratio allowed on FHA Loans is 56.9% to get an approve/eligible per AUS.  Borrowers need to meet the above debt to income ratio requirements in order for automated approval.

Front End Debt To Income Ratio

The front end debt to income ratio cannot exceed 46.9%, even borrowers may not have any other monthly minimum payments.

For example, here is a case scenario:

  • if the borrower has no other expenses except for the proposed housing payment 
  • but the debt to income ratio exceeds 46.9%
  • the borrower will not be able to qualify for an FHA Loan
  • If the housing payment is $1,000
  • borrower’s income is $2,000
  • the borrower has no other monthly minimum debt payments
  • borrower’s front and back end debt to income ratios are at 50%
  • Even though the back end debt to income ratio is below 56.9%, the borrower will not be eligible for FHA Loan

This is due to the fact that the front debt to income ratio exceeds the maximum front end debt to income ratio of 46.9% allowed for an automated AUS Approval.

Solutions To Lowering Debt To Income Ratio

Borrowers with front end debt to income ratios of higher than the 46.9% allowed, there are possible solutions Lowering Debt To Income Ratio:

  • Borrowers can buy the rate down by paying points
  • Lower rates lead to lower housing payments
  • Another solution Lowering Debt To Income Ratio is to change FHA loan term to 7-year adjustable rate mortgage versus fixed rate mortgage
  • Adjustable rate mortgages often have much lower interest rates than 30 year fixed rate mortgages
  • Other solutions may be to shop for homeowners insurance
  • Shop for lower insurance premium
  • Or change homeowners policy to get the bare minimum required by the lender to lower homeowners insurance premium
  • Borrowers no other debts besides proposed housing payment and higher credit scores may see if they can qualify for a conventional mortgage versus an FHA loan
  • This is due to the fact that FHA has a very steep annual mortgage insurance premium
  • Conventional loan programs require a minimum of 5% down payment on a home purchase versus FHA’s 3.5% minimum down payment requirement
  • But the private mortgage insurance on a conventional loan can be substantially lower for higher credit score borrowers than FHA MIP
  • There are lender paid mortgage insurance conventional loan programs, called LPMI, where there is no private mortgage insurance required on conventional loans

Non-Occupant Co-Borrowers As Solution Lowering Debt To Income Ratio

If borrowers have explored all solutions lowering debt to income ratios and cannot find a solution, then the last resort would be to get a non-occupant co-borrower. FHA allows multiple non-occupant co-borrowers. Non-occupant co-borrowers need to be a family member and/or relative related to borrowers by blood, law, or marriage. Non-Occupant co-borrowers help boost borrowers income in lowering debt to income ratios.

Related> Mortgage basics

Related> Too much debt for a mortgage?

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