Understanding Debt-to-Income Ratio For a Mortgage

In this guide, we will cover understanding debt-to-income (DTI) for a mortgage. Mortgage borrowers have to realize the importance of debt-to-income ratio when qualifying for a mortgage loan. Every loan program has its own agency guidelines when it comes to DTI. Most mortgage companies have lender overlays on caps on debt to income ratio on FHA, VA, USDA, and conventional loans. Lender overlays are additional lending requirements by mortgage companies that surpass and are higher than the minimum agency guidelines of HUD, VA, USDA, Fannie Mae, Freddie Mac.

HUD Guidelines on Debt-To-Income Ratio on FHA Loans

FHA loans are the best loan programs for homebuyers with high DTI. FHA loans have substantially higher debt-to-income caps versus conventional loans. For example, HUD, the parent of FHA, has the maximum front-end DTI of 46.9% and 56.9% back-end DTI cap to get an approve/eligible per automated underwriting system. However, most lenders lower the debt-to-income ratio caps to 31% front-end and 43% back-end on FHA loans as part of their lender overlays. Speak With Our Loan Officer for Mortgage Loans

HUD FHA Manual Underwriting Guidelines on FHA Loans

HUD Agency Mortgage Guidelines allow manual underwriting on FHA loans. FHA manual underwriting is the same as automated underwriting system FHA loans with the exception of manually underwritten FHA loans that have lower DTI restrictions. The only difference in manual underwriting on FHA loans is the DTI caps are dependent on compensating factors. Here is the HUD manual underwriting DTI requirements on FHA loans.

• 31% front-end and 43% back-end with zero compensating factors
• 37% front-end and 47% back-end with one compensating factors
• 40% front-end and 50% back-end with two compensating factors

Mortgage underwriters have a lot of underwriter discretion on manual underwrites. The debt-to-income ratios above can be higher if the underwriter feels the borrower has strong compensating factors.

VA Loan Requirements on Debt-to-Income Ratios

The Veterans Administration has no maximum DTI caps on VA loans as long as borrowers can get an approve/eligible per automated underwriting system. However, most lenders have maximum caps on debt-to-income ratios on VA loans of 41% or 45% DTI. This is why it is important to fully understand the debt-to-income ratio agency mortgage guidelines on government and/or conventional loans. If you get denied for a mortgage due to having a high debt-to-income ratio but meet the agency mortgage loan guidelines on the loan program you are applying for, you can go to a different lender with no lender overlays on DTI and apply there. Gustan Cho Associates has no lender overlays on debt-to-income ratio on government and conventional loans.

VA Loan Requirements on Manual Underwriting on VA Loans

VA Agency Mortgage Guidelines allow manual underwriting on VA mortgage loans. VA manual underwriting is the same as automated underwriting system VA home loans with the exception of manually underwritten VA loans that has DTI restrictions. AUS-approved VA loans do not have a maximum DTI caps. The only difference in manual underwriting on VA loans is the DTI caps are dependent on compensating factors. Here is the VA manual underwriting DTI requirements on VA mortgages:

• 31% front-end and 43% back-end with zero compensating factors
• 37% front-end and 47% back-end with one compensating factors
• 40% front-end and 50% back-end with two compensating factors

Mortgage underwriters have a lot of underwriter discretion on manual underwrites of VA loans. The debt-to-income ratios above can be higher if the underwriter feels the borrower has strong compensating factors.

Understanding Debt-to-Income Ratio Requirements When Qualifying For a Mortgage

Homebuyers should realize the importance of debt-to-income ratio when qualifying for a home loan. Credit and income are the two leading factors when qualifying for a mortgage loan. However, income is what determines the debt-to-income ratio. Borrowers can have prior bad credit and lower credit scores but as long as they have income, they will qualify for a home loan. However, on the flip side, you can have the highest credit scores in the world, have perfect payment history without a single late payment, have plenty of assets to put down on the home purchase, but with no income to document or very little income, they cannot qualify for a home loan. All mortgage loan programs have a debt-to-income ratio limits. In this article, we will discuss and cover the understanding debt-to-income ratio when qualifying for mortgages. Click here to qualify for a mortgage

HUD DTI Agency Mortgage Guidelines

HUD debt-to-income ratio requirements are the most generous out of all mortgage loan programs: FHA loans allow up to 56.9% DTI for borrowers with a 620 credit score or higher. For borrowers with under 620 credit scores, the automated underwriting system may cap the maximum debt-to-income ratio to 43% DTI to get an approve/eligible per automated underwriting system unless the borrower has strong compensating factors. Fannie Mae requires debt-to-income ratios up to 50% DTI on conventional loans. Borrowers applying for mortgage loans think that credit scores are the most important factor associated with getting a mortgage loan approval. More importantly than the credit scores and the down payment required on a home purchase is the debt-to-income ratio, also referred to as DTI.

Importance of Debt-to-Income Ratio: What is DTI?

Lenders measure the ability of borrowers to make timely payments on their home loans by analyzing the borrower’s debt-to-income ratio. The debt-to-income ratio of a mortgage loan application is expressed as a percentage and is calculated by dividing the sum of all of the minimum monthly debt payments such as the following:

• credit card payments
• auto loan payments
• student loan payments
• installment loan payments
• proposed P.I.T.I. ( principal, interest, taxes, insurance )
• all other recurring monthly debt of the borrower by the borrower’s gross monthly income

That percentage is the borrower’s DTI.

What is Considered Qualified Income by Mortgage Underwriters

When getting qualified for a home mortgage loan, debt-to-income ratio is the deciding factor on how much home you will qualify for: Lenders will only accept documented income and cash income does not count. For example, a paycheck counts a documented income since the employer takes taxes out and gives employees W-2s at the end of the year. Cash income earned from a part-time job will not count in debt-to-income ratio calculations since the cash is not documented. Part-time income, bonus income, and overtime income can be used for qualifying income. However, borrowers need at least 2 years of steady part-time income, overtime income, and bonus income in order for it to count. Social security and pension can also count as qualified income in mortgage income qualification.

Importance of Debt-to-Income Ratio When Underwriters Analyze Qualified Income

Not all sources of income of the borrower can be used as qualified income. For example, part-time income, overtime income, and other income cannot be used unless the borrower has been getting that income for the past two years. Declining other income cannot be used as qualified income and is negated and cannot be used as qualified income.

Cash income cannot be used as income in mortgage qualification. Mortgage underwriters will require two years of tax returns from all borrowers.

All unreimbursed expenses will count against gross income and the adjusted gross income will be used as qualified income. Gustan Cho Associates offers W2 Income Only Mortgages for W2 Wage Earners as long as borrowers do not have Schedule E and C Income Write off on their federal income tax returns.

Income-Based Repayment on FHA Versus Conforming Loans

High student loan balances are one of the biggest problems borrowers face when qualifying for home loans. FHA loans are the most popular loan program for first-time homebuyers, borrowers with bad credit, homebuyers with credit scores down to 500 FICO, borrowers with high debt-t0-income ratio, and homebuyers with outstanding collections and charged-off accounts.

Under HUD 4000.1 FHA Handbook Guidelines, HUD now allows and permit Income-Based Repayment (IBR) on student loans. Fannie Mac and Freddie Mac also allow IBR payments reporting on consumer credit reports.

Borrowers with high balances on their student loans may need to have their loan officers opt-in to qualify for FHA versus conventional loans due to HUD having a higher cap on debt-to-income ratios.  If you  have any questions about the information on this blog or need to qualify for a mortgage with high debt-t0- income ratio, please contact us at Gustan Cho Associates at 800-900-8569 or email us at gcho@gustancho.com. Text us for a faster response. Connect with our expert for your mortgage enquiry even in holidays

FAQs: Understanding Debt-to-Income Ratio For a Mortgage

• 1. What is a Debt-to-Income (DTI) Ratio? Lenders determine a borrower’s ability to manage monthly payments and pay off debts using the Debt-to-Income (DTI) ratio. The ratio is computed by dividing the total monthly debt payments by the gross monthly income.
• 2. Why is DTI important for mortgage qualification? DTI plays a critical role by enabling lenders to assess borrower’s ability to handle additional debt. A reduced DTI suggests that borrowers are better equipped to handle monthly payments, lowering their risk as loan candidates.
• 3. What are the DTI limits for FHA loans? For FHA loans, HUD allows a maximum front-end DTI of 46.9% and a back-end DTI of 56.9% for automated underwriting system approvals. However, most lenders impose stricter overlays, capping DTI at 31% front-end and 43% back-end.
• 4. How does manual underwriting affect DTI limits for FHA loans? Manual underwriting has lower DTI limits for FHA loans based on compensating factors. Without compensating factors, the limits are 31% front-end and 43% back-end. With one factor, they can be increased to 37% front-end and 47% back-end, and with two factors, to 40% front-end and 50% back-end. Strong compensating factors can allow underwriters to exceed these limits.
• 5. What are the DTI requirements for VA loans? The Veterans Administration (VA) only sets maximum DTI limits for VA loans once the borrower gets approval through the automated underwriting system (AUS). However, most lenders cap DTI at 41% or 45%. Manual underwriting for VA loans also follows a tiered system based on compensating factors, similar to FHA loans.
• 6. How do compensating factors influence DTI limits? Compensating factors, such as a larger down payment, substantial savings, or a higher credit score, can allow for higher DTI ratios. These factors give underwriters additional confidence in the borrower’s ability to repay the loan despite a higher DTI.
• 7. What income is considered qualified for DTI calculations? Qualified income includes documented earnings such as wages (W-2), social security, and pensions. Part-time, overtime and bonus income must be consistent for at least two years to count. Cash income is only considered if documented and reported on tax returns.
• 8. Can student loans affect DTI calculations? The calculation of DTI is affected by student loans. Both FHA and conventional loans permit using Income-Based Repayment (IBR) plans. Individuals with substantial student loan balances might discover that meeting FHA loan requirements is simpler since FHA loans have higher DTI caps than conventional loans.
• Q9. What should borrowers do if denied a mortgage due to high DTI?  If denied a mortgage due to high DTI but the borrower meets agency guidelines, they should consider applying with another lender that does not impose strict overlays. Gustan Cho Associates, for example, has no overlays on DTI for government and conventional loans.
• 10. Where can borrowers get help with high DTI ratios? Borrowers can contact Gustan Cho Associates for assistance with qualifying for a mortgage despite high DTI ratios. They can be reached at 800-900-8569 or via email at gcho@gustancho.com.