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Discussions tagged with 'FHA Manual Underwriting Guidelines on HIgh DTI'
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FHA Manual Underwriting Case Scenario on High-Debt-to-Income Ratio
GCA Mortgage Forums will post real, live case scenarios where borrowers could not qualify at other lenders, and the team at Gustan Cho Associates finds solutions to problems other mortgage companies cannot solve and restructures the loan. According to Marga Jurilla, the executive assistant and operations manager at Gustan Cho Associates, the following is said about Gustan Cho Associates:
We may not be able to solve and help borrowers who could not qualify at other mortgage companies. The team at Gustan Cho Associates often re-evaluates borrowers who got denied at other lenders and helps the borrower in structuring the loan so it meets the agency guidelines and ends up closing. If you are in a stressful situation in the mortgage process and your lender issues a mortgage loan denial, give us a call or email us at Gustan Cho Associates. We have a national reputation for being able to do loans that other lenders cannot do. This is not a marketing statement BUT a FACT!!! There are instances where Gustan Cho, NMLS 873293, and/or his licensed, experienced mortgage loan originators will contact your current MLO and guide them in a way where they can restructure the loan and resubmit it to their underwriter for a clear-to-close.
After restructuring the loan and making sure it meets the minimum agency (HUD, VA, USDA, Fannie Mae, or Freddie Mac guidelines, we normally get a conditional loan approval. Our mortgage processor and Loan Officer Assistants clear conditions promptly and resubmit the file for a clear to close. Once we get the clear to close, our closing department coordinates it with the title company and schedules the closing. At closing is where ownership changes hands.
Discussion Question:
Have you seen an FHA manual-underwriting file saved by refinancing installment debt, documenting additional qualifying income, or restructuring the transaction before closing?
The case scenario below is an actual case scenario on a home purchase for a husband and wife in a community property state. One year out of a Chapter 13 Bankruptcy dismissal. The middle credit score for the borrower is 670 FICO, and the middle credit score for the spouse is 745 FICO. Front-End debt-to-income ratio is 28%, and the back-end debt-to-income ratio is 53.5%.
FHA Manual Underwriting Case: Restructuring High DTI With Auto Refinances and Clergy Housing Allowance
We are handling a complex FHA purchase that demonstrates how a mortgage file can be restructured rather than denied when the debt-to-income ratio is too high. The appraisal is done, and most of the paperwork is ready. We just need to transfer the FHA case number to the new lender to keep things moving.
The main challenge is the borrowers’ back-end debt-to-income ratio under the FHA manual underwriting.
Two Large Auto Payments Are Driving Up the Borrowers’ DTI
The borrowers currently have two large vehicle payments.
Each auto loan payment is about $1,100 per month, so together the two vehicles add around $2,200 to their monthly debt.
One borrower has already been approved to refinance a vehicle loan.
The Refinance Should Lower the Monthly Payment from About:
- $1,100 per month
- to approximately $700 per month
- This would cut about $400 per month from their qualifying debt.
- The second borrower is also trying to refinance.
- If approved, and if their payment drops by about $400 per month, too, the household could cut about $800 per month from their qualifying debt.
- That could have a major impact on the FHA manual underwriting.
- This could make a big difference in the FHA manual underwriting debt-to-income calculation. 50%
- The goal is to get the borrowers’ back-end DTI below the FHA manual-underwriting limit.
- Lowering recurring debt can be just as important as raising qualifying income.
Here, reducing two large car payments could greatly improve the qualification numbers without changing the home price or loan amount. The borrowers can also look at other auto-refinance options to see if they can get an even lower monthly payment. However, any new credit or refinance during the mortgage process must be fully documented and reviewed by the lender. The underwriter will need to review the new payment, confirm that the old loan is paid off, and assess how the change affects the borrowers’ credit and assets.
Can a Clergy Housing Allowance Be Used as FHA Qualifying Income?
There is another important part of this case.
- One borrower is a member of the clergy.
- Historically, the borrower donated the compensation received for preaching or ministry services back to the congregation.
- From now on, the borrower is expected to receive a documented $ 2,500-per-month housing allowance.
- The housing allowance has been documented in writing.
- The mortgage team is checking whether the $2,500 monthly clergy housing allowance can count as qualifying income under FHA rules.
- This could improve borrowers’ qualifying income and further reduce DTI.
- However, we are not yet counting the housing allowance.
- The underwriter must first confirm it meets FHA requirements for stability, documentation, history, if needed, and likelihood of continuing.
- This distinction is important.
- A written promise of future income does not automatically make it acceptable for mortgage qualification.
Why This FHA Case Is a Good Example of Mortgage Restructuring
This case shows why it’s important to look at a tough mortgage file from different angles before deciding the borrower can’t qualify. The problem was a high back-end DTI.
Instead of Just Trying to Increase Income, We are Looking at Several Possible Solutions:1. Reduce the First Auto Payment
One auto refinance has already been approved and could reduce the monthly obligation by approximately $400.
2. Reduce the Second Auto Payment
A second refinance could also lead to another significant drop in monthly debt payments.
3. Shop for an Even Lower Required Auto Payment
If another refinance option results in a lower payment, the borrowers’ qualifying DTI could improve even more.
4. Determine Whether the Clergy Housing Allowance Is Eligible Income
The underwriter is checking if the documented $2,500 monthly housing allowance can be included.
5. Recalculate the FHA Manual-Underwriting DTI
Once the new auto payments and any extra income are fully documented, the lender can recalculate the front-end and back-end ratios.
Important FHA Underwriting Lesson
A high DTI does not always mean the mortgage can’t go through. Sometimes the best approach is to identify which debts can be reduced, determine whether additional documented income can be used, and restructure the loan file in accordance with FHA guidelines.
At the same time, borrowers should always check with their mortgage professional before opening, refinancing, closing, or changing any debt.
A transaction intended to improve DTI can create new underwriting problems if it leads to more credit checks, changes in assets, undisclosed debt, or missing documentation. It is a strong example of why experienced mortgage professionals often look beyond the initial DTI calculation before giving up on a difficult FHA loan.
https://gustancho.com/hud-manual-underwriting-dti-guidelines/
gustancho.com
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