Overlays On Debt To Income Ratio On FHA Loans

Overlays On Debt To Income Ratio On FHA Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

This BLOG On Overlays On Debt To Income Ratio Was UPDATED And PUBLISHED On February 13th, 2020

Overlays On Debt To Income Ratio On FHA Loans

Home Buyers who got issued pre-approval from a mortgage loan originator but think that the loan amount is not enough may have options.

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 down payment buyers put down
  • DTI is what determines the maximum loan amount borrowers qualify for

In this article, we will discuss and cover Overlays On Debt To Income Ratio On FHA Loans.

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 number of monthly housing expenses compared to 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 a total of $1,000.00
  • Homebuyers who have mortgage insurance and association fees would have to add those figures as well to 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

what are the 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 the 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 to take monthly housing expenses of $1,000.00 and add the rest of the 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 loan officers 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 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:
    • This holds true 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
  • On conventional loans, it can be grossed up 25%
  • For example, here is a case scenario:
    • 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
  • This can be done 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 text us for faster response. Or email us at gcho@gustancho.com.

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