Non occupied coborrowers if your debt to income ratio is too high
Just because you have a good paying job and great credit scores does not always qualify you for a mortgage loan approval. A large percentage of those who do not qualify for a mortgage loan is because they have high debt to income ratios. On conventional mortgage loans, debt to income ratio cannot normally exceed 45%. On FHA mortgage loans, debt to income ratios vary but generally most FHA mortgage lenders want to see a 45% debt to income ratio. I have specialty FHA mortgage lenders who will qualify up to a 56.9% debt to income ratio if they have compensating factors.
What are compensating factors
Compensating factors are benefical factors that makes a mortgage loan borrower credit profile look stronger thus avoiding risk factors from the mortgage lender. Examples of compensating factors are retirement funds such as IRA’S, 401K’s, savings accounts, stock and securities accounts, insurance policy, working spouse who is not on the mortgage loan, dividends from investments, and general investment accounts. Although compensating factors are not used to calculate debt to income ratios, compensating factors will be taken into consideration when underwriting a mortgage loan.
What is debt to income ratios
Debt to income ratios is the amount of total monthly payments you have divided by your total gross monthly income. For example, if you have a car payment of $200 per month, minimum credit card payments of $200 per month and a student loan of $100 per month, your total monthly payments is $500 per month. You take the $500 per month total monthly payments and you then divide it by your total gross monthly income. Say your monthly gross income is $1,000, then you take your monthly debt obligations of $500 and divide it by your gross income of $1,000 which yields 50%. Your debt to income ratio is 50%. Utility payments, cable tv payments, internet payments, insurance payments, and other payments like cell phone payments are not factored in when calculating debt to income calculations.
Non occupied coborrowers
FHA mortgage loans allow non occupied coborrowers. Non occupied coborrowers are often needed if the main mortgage loan borrower has high debt to income ratios. The most common monthly debts that spikes debt to income ratios are monthly car payments and child support/alimony payments. A car payment is usually $200 a month or more per month which is equivalent to a $50,000 worth of buying power on a home purchase.
The maximum debt to income ratio that a mortgage loan borrower can qualify for a FHA mortgage loan is 56.9%. Conventional loan programs do not allow non occupied coborrowers. FHA is the only mortgage loan program that allows a non occupied coborrowers.
Credit scores of non occupied coborrowers
When it comes whose credit scores the mortgage lender uses, the mortgage lender uses the middle credit scores of the lower of credit scores of borrowers. If you have a non occupied coborrowers and their middle credit scores are 640 FICO and your credit scores are 720 FICO, the non occupied coborrowers credit scores of 640 FICO will be use for mortgage underwriting purposes.