Solutions To High Debt To Income Ratios On Home Purchase
This Article Is About Solutions To High Debt To Income Ratios On Home Purchase:
All loan programs including government and conventional loans have caps on debt to income ratio. VA loans do not have a maximum debt to income ratio cap as long as the borrower can get an approve/eligible per automated underwriting system. GCA Mortgage has approved countless borrowers with over 60% DTI on VA loans. Normally, the automated underwriting system can approve borrowers with up to 65% DTI on VA loans if the borrower has strong residual income. Gustan Cho Associates has launched a new 90% LTV jumbo loan program with a maximum 50% DTI cap. There are many solutions to high debt-to-income ratios when it comes to borrowers. Non-QM loans normally cap debt to income ratio up to 50% to 55%.
In the following paragraphs, we will cover the following topics:
- The importance of debt to income ratio for lenders.
- The updated debt to income ratio guidelines on the mortgage loan programs at Gustan Cho Associates.
- Adding non-occupant co-borrowers.
- Other alternatives as solutions to high debt to income ratios.
At Gustan Cho Associates, our philosophy is if there is a will, there is always a way. We have thousands of borrowers with higher debt-to-income ratios qualify for a mortgage.
The Importance of Debt to Income Ratio on Government and Conventional Loans
Debt to income ratios is one of the most important factors when it comes to qualifying for home loans. The debt to income ratio determines the borrower’s ability to repay the new loan. The debt to income caps is different for every loan program. Debt to income ratios is calculated by taking the sum total minimum monthly payments and dividing it by gross monthly income.
Mortgage applicants with high debt to income ratios most likely have to go with FHA loans instead of conventional loans. This is because FHA loans are more lenient with high debt-to-income ratios.
Conventional loans normally cap the debt to income ratios at 45% to 50% DTI. However, to get be able to qualify for a conventional loan with higher than a 45% DTI, you would need a 720 FICO or higher or a 20% down payment. This is because private mortgage insurance companies will not insure borrowers with higher than 45% DTI if they do not have a 720 or higher. Borrowers with great credit and higher credit scores but high debt to income ratio need to go with FHA versus conventional loans. FHA loans are much more generous when it comes to solutions to high debt to income ratios.
Debt To Income Ratio Caps On Manual Underwriting
FHA and VA loans are the only two loan programs that will allow manual underwriting. The maximum debt to income ratio on FHA manual underwriting is 40% front end and 50% back end with two compensating factors. VA manual underwriting cap the maximum debt to income ratio up to 50% o 55% DTI. Gustan Cho Associates can do manual underwriting up to 65% DTI on VA loans if the borrower has strong residual income and multiple compensating factors. The mortgage underwriter has a lot of underwriter discretion on manual underwrites. Approve/eligible per AUS borrowers that are marginal borrowers can get their files downgraded to a manual underwrite by a mortgage underwriter.
FHA Loans cap back-end DTI at 56.9%. FHA’s front-end debt to income ratios is capped at 46.9%.
Solutions To High DTI When Qualifying For Loan
Lenders should really qualify to see whether borrowers meet the maximum debt to income ratio threshold initially when qualifying borrowers. Just supplying your 2 years W-2s and/or most recent paycheck stubs is not enough.
Does not warrant full income qualification. Two years of tax returns should be carefully reviewed to see if there are deductions that can affect debt to income ratios. Other factors such as alimony, child support, or scheduled payment plans to the IRS, collectors, or other creditors need to be taken into account as well.
Risks With Closing With High Debt To Income Ratio
Borrowers with higher debt to income ratios who barely qualify for a mortgage need to realize that the closing on a mortgage loan can be risky.
Borrowers who are at the maximum 56.9% debt to income ratio cap when getting qualified need to realize any penny of monthly increase of debt payment can risk their mortgage. For example, if homeowners insurance monthly payment is more than the payment used to qualify initially that can push the maximum debt to income ratio caps.
Borrowers who needed flood insurance but the loan officer did not calculate it can be at risk of going over the maximum debt to income ratio allowed. If property taxes are more than it was originally stated, it can be a deal killer. If homeowners association dues are higher than originally quoted, again, it can be a deal-breaker.
Solutions For High DTI At Last Minute
There are many instances where the mortgage loan applicant qualified initially and met the debt to income ratio requirements but due to added monthly expenses and/or reduction of income due to verification of employment or due to the write-offs, they no longer meet the debt to income ratio requirements.
Some solutions for high debt to income ratios include the following:
Adding a non-occupant co-borrower:
- The Federal Housing Administration (FHA) allows main borrowers to add a family member and/or relatives as non-occupant co-borrowers
- Non-occupant co-borrowers will be added to the mortgage loan but not on the title
- Non-occupant co-borrowers need to be related to the mortgage loan borrower by blood, marriage, and/or law
- HUD allows non-family to become non-occupant co-borrowers.
- If the borrower is not related to the main borrower, HUD requires a 25% versus a 3.5% down payment on a home purchase.
- Fannie Mae and Freddie Mac allow non-occupant co-borrowers who are not related to the main borrower to be added to the main borrower for a 3% or 5% down payment conventional loans.
Buying down the mortgage rate can greatly reduce the monthly mortgage payments:
- This can be a potentially creative solution to solve the high debt to income ratio problem
- This is done by paying points for lower rates
- If borrowers plan on buying down interest rates they should get a steep sellers concession towards buyer closing costs
- Borrowers can use sellers concessions to buy down rates
- FHA allows a maximum of 6% sellers concession towards a buyer closing costs
- VA Loans allows up to 4%
Conventional loans allow up to a maximum of 3% sellers concession towards buyers closing costs on owner occupant homes:
- 2% sellers concessions for investment homes
Paying down or paying off revolving credit accounts can be another solution to reduce the debt to income ratios.
Also, any installment debt such as car loans, alimony, child support payments that are 10 months or less can be discounted. It is not counted towards calculating debt to income ratios.
Lender With No Overlays On Debt To Income Ratios
Most lenders have overlays on debt-to-income ratios. Borrowers with higher debt to income ratios who cannot qualify for a mortgage at other lenders due to their lender overlays can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] Gustan Cho Associates has ZERO OVERLAYS on FHA, VA, USDA, and Conventional Loans.