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FHA loans with high debt-to-income ratio
I want to purchase a home. But I’m stuck with the Debt to Income Ratio. Not because I have debt. I don’t have debt ( I already paid it all). However, my income for W2 2020 is only $41,000, or around $3600/month. I have 150K in my bank, but I only want to use it for a downpayment of 3,5% because I want to use the rest of the money to build ADU, maybe about 2 or 3 bedrooms, so I can rent it to other people to make income. because rent average around here is for room rent about 800- 900 per month. I stuck with the DTI Ratio because of my recent income and high house prices around my city. I need a purchase price of 450k-500k with 3,5%. and my credit score is 700. So yeah, that’s the situation. I need advice or a solution.
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1 Reply
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Buying a home specifically to construct an Accessory Dwelling Unit (ADU) is a prudent investment strategy, particularly if you intend to rent the unit for extra cash inflow. Consider your debt-to-income (DTI) ratio, income, and other financial aspects as follows:
Take Note of Your DTI Ratio
Current Salary: Annual: $41,000, which equals monthly – $3,417.
Desired House Price: $450,000 to $500,000.
Downpayment (3.5%): For a house worth $450,000, the downpayment will be $15,750, whereas it will be $17,500 for a $500,000 house.
Loan Amount: On the other hand, for the loan of $450,000, the amount remaining on the loan will be $434,250, and for the $500,000, it will be $482,500.
Setting Up Your Monthly Mortgage Payments.
Estimation of Monthly Payments: A rough estimation using a mortgage calculator settles at a $2,586 monthly payment. This amount is $2,323 compared to a $500,000 counterpart.
Understanding DTI through Debts.
Total Monthly Debt Payments: The estimated monthly mortgage payment amounts to $2,323 and $2,586.
Calculation of DTI: Debt-to-income is the total of debts divided by monthly earnings.
For instance, if they took out loans of $450,000, their DTI would be 67.9 percent, and if they borrowed $500,000, the DTI would be 75.7 percent.
DTI Improving Strategies.
In the case of FHA loans, the DTI ratio is substantially higher than 43 percent, which complicates the clientele’s ability to obtain financing.
How To Get Out Of This Situation.
Demonstrating That The ADU Will Generate Rental Income: At times, the price of the rental property is not high—meaning all ADUs can be used to offset the mortgage payment. Some lenders might accept that projection to add to your DTI cash flow calculation. Provide expected rental income as evidence post-construction of the ADU.
Side Jobs or Freelance Work: If applicable, try getting a temporary job to bolster the income you intend to declare on the loan application.
Consider Alternative Financing Options:
203(k) Loan: Under this program under the FHA, you can pay a single mortgage, which covers both the home and the cost of renovation or even construction of an ADU. This can be beneficial to you in such that the anticipated rental return may be taken into account.
Conventional Loans with Lower DTI Requirements: While extremely rare, this type of lender contemplates DTI more loosely when borrowers have good assets and credible credit scores.
Use a Larger Down Payment:
The only way to make that change is to remortgage while putting down a bigger deposit, as you did not underspend so much on the ADU. This would, therefore, have shrunk your DTI ratio, as lower payments and fewer loans overall could result in a lower loan-to-income ratio.
Find a Co-Signer:
Your relative and even a friend can co-sign for you. This will also enable you to put in less income whenever necessary.
Explore Different Locations:
Attempt to source homes for rental and purchase in lower-priced locales, as this could be essential in managing your new housing budget while lowering your DTI ratio.
Contact a Mortgage Broker:
A loan officer can assist you in branching out and finding a lender that will grant you a more fitting loan product.
Wrap-Up
Even though the amount of income you are currently earning makes it harder to qualify for a mortgage, there are several techniques that you can use to better your chances. You should consider working to increase the amount you earn, check available 203(k) loans, and visit a mortgage expert to get the best recommendation for your predicaments. Also, adding an ADU could be precious, so trying everything possible to achieve it makes sense. If you have any other questions or doubts, please ask them, and we will be happy to assist you with the answers!