Importance Of Debt To Income Ratio

Debt to income ratio is probably the most important factor when it comes to qualifying for a mortgage loan, no matter which mortgage loan program you choose. Debt to income ratio is the total monthly minimum payments a borrower has divided by the borrower’s monthly gross income. The result is the debt to income ratio. Every mortgage loan program has a maximum debt to income ratios allowed.  For example, for conventional loans, the maximum debt to income ratio permitted is 45%. What this means is that the sum of all of the borrower’s monthly minimum payments, which includes the proposed monthly principal, interest, taxes, and insurance payments of the the new home, divided by the borrower’s monthly gross income cannot exceed 45%. On a case scenario, a mortgage loan borrower who grosses $10,000 per month cannot have monthly total debts exceeding $4,500 per month which includes the borrower’s proposed new mortgage payments and escrows.

Debt To Income Ratio Requirements For Conventional Loans

As mentioned earlier, conventional loan programs limits the debt to income ratio caps to 45% in order to get an approve/eligible per automated underwriting system. There are two types of debt to income ratios. The front end debt to income ratios and the back end debt to income ratios. The front end debt to income ratios is the monthly principal, interest, taxes, and insurance payments divided by the borrower’s monthly gross income. The principal, interest, taxes, and insurance is also referred to as PITI. There are no front end debt to income ratio requirements on conventional loans. The back end debt to income ratios is the PITI plus all other minimum monthly payments such as minimum credit card payments, automobile payments, student loan payments, alimony payments, child support payments, and any other monthly obligations that is reported to the credit reporting agencies divided by the borrower’s monthly gross income. Again, the maximum debt to income ratios required to get a conventional loan approval per automated underwriting system cannot be greater than 45%. Debt to income ratios is also referred to as DTI.

Debt To Income Ratio Requirements For FHA Loans

FHA Loans are much more generous when it comes to debt to income ratios. If the FHA loan borrower has credit scores of 620 FICO or under, the maximum debt to income ratio is capped at 43%. If the mortgage loan borrower has credit scores of at least 620 FICO or higher, then the maximum front end debt to income ratios is capped at 46.9% and the maximum back end debt to income ratios is capped at 56.9% in order to get an approve/eligible per automated underwriting system.

Debt To Income Ratios On VA Loans

Debt to income ratios on VA Loans depends on the automated findings from the automated underwriting system. There are cases where debt to income ratios on VA Loans can be as high as 60% debt to income ratios if the automated underwriting system approves it due to compensating factors. To be on the safe side, having a 41% debt to income ratio on VA Loans will yield an almost guarantee automated approval.  VA Loans are only for veterans with Certificate of Eligibility papers and VA Loans does not require any down payment.

Debt To Income Ratios On USDA Loans

USDA Loans normally cap debt to income ratios at 41%. There are no down payment requirements on USDA Loans, however, there is a maximum household income cap. To qualify for USDA Loans, the property needs to be in a USDA area and the mortgage loan borrower needs to meet USDA lending guidelines with regards to credit scores, income, and other USDA mortgage lending guidelines.

Mortgage Lender Overlays On Debt To Income Ratios

Just because you meet the maximum debt to income ratios permitted by the particular mortgage loan program does not mean that you will be set with the mortgage lender. Mortgage lenders have what they call mortgage lender overlays which are guidelines set by the mortgage lender that surpasses the minimum federal mortgage lending guidelines. For example, the maximum debt to income ratios permitted by FHA for borrowers with at least a 620 FICO credit score is 56.9%. However, many FHA mortgage lenders may have mortgage lender overlays that may cap the back end debt to income ratios at 45%. If you are a home buyer or a homeowner needing to refinance your mortgage and need a mortgage lender with no mortgage lender overlays, please contact me at 262-716-8151 or email us at gcho@gustancho.com. We are available 7 days a week, late evenings, weekends, and holidays as well to answer any of your questions and issue you a pre-approval so you can shop for the home of your dreams.

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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