Overlays On Debt To Income Ratio On FHA Loans

This BLOG On Overlays On Debt To Income Ratio Was UPDATED On June 25. 2017

Home Buyers who got issued pre-approval from a mortgage loan originator but think that the loan amount is not enough may have options. Debt To Income Ratio is the determinant on how much borrowers can qualify for. Overlays on debt to income ratio can limit maximum loan amounts borrowers can qualify for.

  • The reason mortgage loan originators issue a predetermined mortgage loan amount is from the income and credit analysis as well the the down payment buyers put down.
  • DTI is what determines the maximum loan amount borrowers qualify for.

Qualifying For Higher Loan Amounts

What determines the amount of mortgage loan a borrower can get approved for is based on the following factors:

  • Borrower’s credit scores
  • Borrower’s down payment
  • Most importantly, the borrower’s debt to income ratio. 
  • The front end ratio is the amount of your monthly housing expenses compared to your monthly gross income. 
  • For example, say a home buyers principal and interest payment is $600.00
  • Monthly property taxes are $200,00
  • Homeowners insurance is $200.00. 
  • Total housing expenses are at total of $1,000.00. 
  • Home buyers who have mortgage loan insurance and association fees would have to add those figures as well to your housing expenses. 
  • Then take this figure and divide it by borrowers monthly gross income. 
  • Let’s say  monthly gross income is $5,000.00. 
  • Dividing the $1,000.00 monthly housing expense by monthly gross income of $5,000.00, that yields a front end debt to income ratio of 20%.

Debt To Income Ratios

  • The back end ratio is computed by comparing total monthly debts to monthly gross income. 
  • Monthly debt will include all of monthly housing expenses PLUS all other expenses such as minimum monthly credit card payments, automobile payments, student loans, child support payments, and any other monthly obligations. 
  • Say other monthly payments are $1,000.00. 
  • So to calculate the back end ratio is take monthly housing expenses of $1,000.00 and add the rest of monthly debt obligations of another $1,000.00 and get total, which is $2,000.00. 
  • Take $2,000.00 and divide it by monthly gross income of $5,000.00 and that yields back end ratio of 40%.

Overlays On Debt To Income Ratio

  • Most mortgage loan brokers will probably maximize housing ratio and back end ratio at no greater than 46.9%/56.9%. 
  • The above is the maximum DTI allowed to get an approve/eligible per AUS.
  • However, depending on the type of lenders the mortgage loan officer works for, the lender may have overlays on debt to income ratio. 
  • Choose a loan officer who has no lender overlays on debt to income ratio. 
  • A home buyer mortgage applicant can use overtime income as long as he or she had consistent overtime for a period of the preceding two years and the probability of future overtime looks promising. 
  • Borrowers who are on social security and are not taxed on social security income, social security income can be grossed up by 15% on FHA Loans.
  • For example, if monthly social security income is $1,000.00 per month, the income can increase that by 15% to yield monthly income to $1,150.00 gross monthly income. 
  • Another way where borrowers can get more buying power on new home purchase is to lower debt to income ratio by eliminating or reducing monthly expenses by paying down or paying off monthly debt obligation such as credit cards, student loans, or auto loans. 
  • Eliminating a $250.00 monthly automobile payment will get you an extra $70,000.00 worth of housing buying power.

Home buyers with higher debt to income ratios who need to get qualified for FHA Loans, please contact us at 1-800-900-8569 or email us at gcho@gustancho.com.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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