High Debt To Income Ratios Mortgage Lending Guidelines

High Debt To Income Ratios Mortgage Lending Guidelines

ByGustan Cho

This Article Is About High Debt To Income Ratios Mortgage Lending Guidelines

Home Buyers can have a great income, great credit, but with too many monthly debt obligations they may have issues in qualifying for a mortgage due to higher DTI. Borrowers with high debt-to-income ratios can qualify for a mortgage. Those exceeding debt to income ratio caps needs to correct their debt to income ratios. This needs to be done to meet the maximum debt to income ratios permitted for Conventional and/or FHA Loans.

In this article, we will discuss and cover the Debt To Income Ratio Mortgage Lending Guidelines.

Debt To Income Ratio Caps On Conventional Loans

Conventional loan programs have lower debt to income ratio requirements:

  • Most conventional lenders do have a debt to income ratio overlays
  • Some lenders who do not have overlays on conventional loans will go off Fannie Mae’s Automated Underwriting System and/or Freddie Mac’s Automated Underwriting System’s automated findings
  • Normally the maximum debt to income ratios permitted by automated findings is 50% debt to income ratios
  • Fannie Mae and Freddie Mac may allow up to 50% debt to income ratios if the borrower has strong credit and assets as well as reserves
  • However, most private mortgage insurance companies will not insure any borrowers with over 45% debt to income ratios unless they have a credit score

Buyers putting a 20% down payment should have no issues with 50% DTI since PMI is not required.

High Debt To Income Ratios: FHA Loans Versus Conventional Loans

FHA has a much higher debt-to-income ratio requirement. HUD allows a maximum front-end debt to income ratio of 46.9%. HUD’s back-end debt to income ratio is 56.9% to get approve eligible per AUS. The front-end debt to income ratio is the total housing payment which includes principal, interest, taxes, insurance, HOA divided by the borrower’s total monthly gross income.

The back end debt to income ratios are the housing payment plus all other minimum debt payments such as the following:

  • minimum credit card payments
  • minimum student loan payments
  • minimum automobile payments
  • other minimum monthly payments divided by the borrower’s gross monthly income

Conventional Loan To FHA Loan

For borrowers with excellent credit but with higher DTI, one option may be not to go with a conventional loan but rather go with an FHA loan. This is due to the more lax debt to income ratio requirements from FHA. One of the major disadvantages of going with an FHA loan is the upfront and annual mortgage insurance premium that FHA requires. The upfront mortgage insurance premium is 1.75% of the total mortgage loan amount. This fee is normally rolled into the balance of the mortgage loan. The annual mortgage insurance premium of 0.85% is escrowed. It is paid monthly along with the borrower’s principal, interest, taxes, and homeowners insurance. FHA loan programs are only for owner-occupant properties. Buyers cannot use FHA Loans for second homes, vacation homes, and investment homes. If the borrower has an extremely high debt-to-income ratio and very little income, FHA Loans are the best option. HUD allows multiple non-occupant co-borrowers as long as the co-borrower is a family member and/or relative of the borrower. There are lenders that will allow non-occupant co-borrowers who are close friends of the borrower and have known the borrower for at least five years.

VA Home Loans With Higher DTI

Most lenders have a debt to income ratio requirements on VA Loans. However, the Department Of Veteran Affairs does not have any debt to income ratio requirements nor credit score requirements on VA Loans. When a lender requires a 620  or 640 credit score requirement that is not VA Guidelines. It is that particular lenders own credit score requirements. Same with debt to income ratios on VA Loans. Most lenders will require a 45% to 50% debt to income ratio requirement by veteran borrowers. Again, VA has no DTI caps. I recently got a VA Loan approved and closed with a 63% debt to income ratio. Gustan Cho Associates has no debt to income ratio nor credit score requirement on VA Home Loans.

Installment Loans Under 10 Months

Borrowers with car loans and/or other installment loans that are under 10 months are exempt that payment to be calculated on debt to income ratio calculations. However, automobile leases do not apply. Leases do not apply because lenders view that once an automobile lease is consumers will get another automobile lease to replace the old automobile lease. Borrowers with an automobile payment or other installment loan with someone else paying may be able to exempt that payment in calculating debt to income ratios. This can be done as long as they can provide proof that someone else is paying for that monthly payment. Need to provide 12 months of canceled checks from the person that is paying those monthly payments. This is common when a parent pays a student loan payment. The parent needs to provide 12 months of canceled checks to the underwriter and the student loan payment is not used towards the calculation of the debt to income ratios.

Deferred Student Loans

FHA no longer allows deferred student loan payments to be exempted from debt to income ratio qualifications. Deferred Student Loans as long as the deferment is at least 12 months are no longer exempt. Income-Based Repayment (IBR) is no longer allowed under HUD Guidelines. Lenders are required to use 1.0% of the outstanding student loan balance as a monthly debt in calculating deferred student loans or student loans in an IBR However, there is a loophole. Borrowers can contact student loan providers and tell them that the lender is requiring a fully amortized monthly payment over an extended-term (normally 25 years). This figure normally turns out to be 0.50%. Borrowers can use this figure in lieu of the 1.0% amount. Make sure to get this in writing by the student loan provider. VA Loans are different when it comes to deferred student loans. VA allows lenders to exempt any deferred student loans that are deferred for 12 or more months from debt to income ratio calculations.

Paying Down Credit Cards And Paying Off Other Debts

Paying down high-balance credit cards or paying off credit accounts are ways of solving high debt to income ratios. Many times when a mortgage loan applicant does not qualify due to high debt to income ratios, just zeroing out the minimum monthly payments on revolving accounts can solve the problem. Other solutions for solving high debt to income ratios can be paying off an installment loan.

For example:

  • borrowers with a car payment that has a $4,000 balance
  • minimum monthly payments are $300.00
  • paying off the $4,000 balance of automobile loan will wipe out the $300 monthly minimum car payment off debt to income qualification

Home Buyers with higher debt to income ratios who need to qualify with a five-star national mortgage company with no lender overlays on government and/or conventional loans can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.