Debt To Income Ratio

Issues With High Debt To Income Ratios

Gustan Cho Associates

Debt to income ratios is one of the most important factors in the mortgage approval process.  There are strict debt to income ratio cap requirements.  For FHA loan programs, the maximum debt to income ratio requirement are as follows:  Maximum front end debt to income ratios allowed per FHA mortgage lending guidelines is 46.9%.  Maximum back end debt to income ratio allowed is 56.9%.  These FHA debt to income ratios are only for mortgage loan borrowers who have credit scores of 620 FICO or higher.  For mortgage loan applicants whose credit scores are at 620 FICO or lower the front end debt to income ratio permitted is 31% and back end debt to income ratios allowed is 43%.  For conventional loans, the maximum debt to income ratios allowed is 45%.  There are no front end debt to income ratio caps for front end with conventional loan programs.

Initial Qualification Process For Home Buyers

Before a mortgage loan originator issues a pre-approval, the most important factor the loan officer will qualify is the mortgage loan applicant’s debt to income ratios.  The proposed housing payment will be analyzed.  The proposed interest rate, principal, interest, property taxes, and homeowners insurance will determine the front end debt to income ratios.  All other minimum monthly debt payments will be taken into account to determine the back end debt to income ratio.  For those mortgage loan borrowers who have high debt to income ratios and barely meet the maximum debt to income ratios allowed are high risk borrowers that even a ten dollar per month extra payment per month may make them over the maximum debt to income ratio permitted.  For FHA mortgage loan applicants who have their back end debt to income ratios at the maximum allowed of 56.9%, a slight increase of homeowners insurance may disqualify them for a mortgage loan approval.

What If Estimated Expense Is Underestimated And Borrower No Longer Meets Debt To Income Ratio Guidelines

When a mortgage loan originator initially takes a mortgage loan application, the proposed housing payment is filled out.  The proposed housing payment includes not just tentative interest rate, but also the proposed property taxes as well as the homeowners insurance.  The borrower’s gross monthly income is also stated on the mortgage loan application.  All minimum monthly payments are imported from the credit report to the mortgage application.  The borrower’s debt to income ratio is then calculated.  There are many cases where a mortgage borrower barely meets the debt to income ratio requirements.  Those mortgage loan borrowers who barely meet the debt to income ratio requirements, a slight increase in any monthly minimum payments may exceed the debt to income ratio maximum allowed.  For example, if the mortgage loan underwriter deducts part of the mortgage loan borrower’s gross monthly income due to the fact that he or she took writeoffs on their tax returns, that may boost the debt to income ratio threshold above the maximum allowed.  If the home buyer’s homeowner insurance premium comes in at higher than the original estimated amount, that too may exceed the maximum debt to income ratio permitted.  If the property taxes are more than the amount stated on the original 1003 mortgage loan application, that too may exceed the maximum debt to income ratios.  If the mortgage rates are higher than originally anticipate, that too can overthrow the maximum debt to income ratios allowed.

Quick Solution To Solve Debt To Income Ratio Issue

Most mortgage lenders will give the mortgage borrower a chance to correct the debt to income ratio issues in the event if the debt to income ratio exceeds the maximum debt to income ratio allowed during the mortgage approval process due to changed circumstances like higher than anticipated homeowners insurance premiums, higher than anticipated mortgage rates, or other unseen circumstances.  One of he quickest solution to overcome high debt to income ratio issues is to pay off existing credit card balances.  Minimum monthly credit card balances can be anywhere between $50 dollars per month to over $200.00 per month.

Fannie Mae And Freddie Mac Guidelines On Paying Off Credit Card Balances During The Mortgage Approval Process

As mentioned earlier, you can pay off your credit card balance to get rid of the minimum credit card monthly payment to solve your higher than anticipated debt to income ratio.  However, if your loan is submitted to a Fannie Mae mortgage lender, Fannie Mae requires if you pay off your credit card to zero balance in order to eliminate the minimum monthly credit card payment, Fannie Mae requires that you close out your credit card account after paying your credit card balance off.  Many mortgage loan applicants do not like the fact that they need to close out their aged credit card accounts but this is not the mortgage lender’s rule but Fannie Mae’s.

Freddie Mac allows you to pay off your credit card balances to a zero balance and does not require that you close out your credit card account.  However, when you first submit your mortgage loan application, it needs to be submitted to a Freddie Mac mortgage lender.  Fannie Mae and Freddie Mac have different mortgage lending guidelines and most mortgage lenders prefer to choose Fannie Mae over Freddie Mac.

Is There Way To Avoid Closing Out Credit Card Account After Paying Off Credit Cards

The only way you can keep your credit cards after paying them off to a zero balance to keep your debt to income ratios within the debt to income ratios permitted is to cancel your mortgage loan application with the lender that is underwriting your loan and start a whole new mortgage loan application with a different mortgage lender after the zero balances is reflected on your credit report.

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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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