Solutions To High DTI And Mortgage Lending Guidelines

This Article Is About Solutions To High DTI And Mortgage Lending Guidelines 

Finding Creative Solutions To High DTI

Home Borrowers who have high debt to income ratios can find creative solutions to high DTI.

• Debt to income ratio is one of the major reasons why mortgage borrowers cannot qualify for a home loan
• Debt to income ratio is calculated by adding all of borrower’s minimum monthly payments including the proposed P.I.T.I  ( principal, interest, taxes, and insurance ) and dividing it by the borrower’s monthly gross income
• FHA Loans has the most generous debt to income ratio caps out of all mortgage loan programs
• FHA mortgage loan borrowers with 620 credit score or higher can have a back end debt to income ratio as high as 56.9% DTI
• However, if your credit scores are under 620, FHA reduces the debt to income ratios to 43% DTI Cap to get an approve/eligible per automated underwriting system

In this article, we will cover and discuss qualifying for a mortgage with high debt to income ratios.

Debt To Income Ratio Mortgage Guidelines

Every loan program has its own debt to income ratio requirements:

• Fannie Mae mandates a maximum debt to income ratio of 50% DTI to qualify for conventional loans
• USDA Loans cap the debt to income ratios to 29% front end 41% back end DTI
• VA Loans debt to income ratios is per automated findings per Automated Underwriting System
• VA does not have a minimum credit score requirement nor debt to income ratio cap
• Most Jumbo Mortgage Lenders cap the debt to income ratio to 40% DTI for Jumbo Mortgages
• Most portfolio mortgage lenders cap their debt to income ratios at 43% DTI on their portfolio loan programs

Gustan Cho Associates has Jumbo Loan Programs with over 50% DTI Caps.

Solutions To High DTI By Paying Down Credit Cards

Paying down credit card balances is one of the most common solutions to high DTI.

• If  the borrower has a very high debt to income ratios and has credit card balances, it is highly recommended that they pay down all of their credit cards prior to having the mortgage loan officer registering and submitting the loan to processing and underwriting
• If the borrower needs to pay down their credit cards during the mortgage approval process, they not only need to pay down the credit card balances
• But they also need to close out their credit card accounts
• FHA and Fannie Mae Mortgage Lending Guidelines state that if borrower needs to pay down their credit card balances during the mortgage approval process, the credit card also needs to be closed
• Borrowers need to paid-off credit cards as well as the closed credit card accounts
• It needs to be reflected on the consumer’s credit report
• However, if borrowers have their credit card balances paid off prior to the loan officer submitting their mortgage loan application to processing and underwriting, then they do not have to close out their credit card accounts
• The paid down or paid off credit card balances needs to reflect on the credit report
• This can be done through a rapid rescore

Freddie Mac does allow borrowers to pay down and/or pay off their credit card balances during the mortgage process without having them to close it out.

Solutions To High DTI By Shopping For Homeowners Insurance

Borrowers with high debt to income ratios, every dollar in monthly expenses can be a potential deal-breaker.

• Some solutions to high DTI is shopping for the homeowners’ insurance where you can get the lowest possible premium for the best coverage
• The homeowners insurance agent should be creative and see if he or she can give you a discounted rate if you do a package deal by including cars and other insurance needs with new homeowners insurance
• Homeowners insurance can vary from insurance company to insurance company
• Shopping for homeowners insurance should be done early in the mortgage process and not at the last minute
• The mortgage loan originator, real estate attorney, real estate broker should all have contacts with homeowners insurance agents
• Please get more than one homeowners insurance quote

Compare apples to apples to make sure that you get the best deal.

Other Solutions To High DTI

Buying down the rate with points are other solutions to high DTI.

• Buying down mortgage rates can be expensive
• On the average, it would cost a borrower 1 Discount Point, or 1% of the loan amount, to buy down 0.25% mortgage interest rate
• So buying down 0.50% of mortgage interest rates, a borrower will have to pay 2 points which are 2% of the loan balance
• On a $200,000 mortgage loan, one point equals to 1% of the $200,000 balance which is $2,000
• 2 Points on a $200,000 loan amount is equivalent to $4,000

Home Buyers can use sellers concessions for points to buy down the mortgage interest rates. FHA Loans allows up to 6% in sellers concessions credits by home sellers to offer homebuyers towards closing costs. Buying points is considered part of closing costs. VA Loans allow up to 4% in sellers concessions and conventional loans allow up to 3% of sellers concessions for primary and second home financing and 2% sellers concessions for investment home financing.