Understanding Debt To Income Ratio Mortgage Guidelines

by Peter Bieda

This Article Is About Understanding Debt To Income Ratio Mortgage Guidelines.

Understanding Debt To Income Ratio is important when qualifying for a home mortgage.  One important factor to take into consideration is how much you qualify is different than how much you can afford. Mortgage underwriters will calculate the debt to income ratio on how much you qualify for a mortgage. However, you need to do your own calculations and determine how much house you can afford. Mortgage underwriters will only take debts that report on your credit report into consideration as well as your proposed. housing payment (P.I.T.I.). Underwriters will not take your personal expenses into consideration such as utilities, educational expenses, maintenance, insurance, food, entertainment expenses, childcare, elderly care, and other expenses.

Debt To Income Ratio Caps On Loan Programs

Every home mortgage program has its own maximum debt to income ratio caps with the exception of VA loans. VA loans have no maximum debt to income ratio caps as long as you can get an approve/eligible per automated underwriting system (AUS). Normally, you can get an AUS approval with high DTI on VA loans as long as you have a strong residual income  The debt to income ratio often referred to as DTI, is the percentage of your gross income that goes towards paying your fixed monthly debts. Mortgage underwriters use the debt to income ratio to determine how much of a mortgage you can qualify and borrow. One of the biggest hurdles in qualifying for a mortgage is having a high debt to income ratio. This holds especially true for borrowers with high student loan debt.

In this article, we will discuss and cover the understanding debt to income ratio when qualifying for a home mortgage.

Understanding Debt To Income Ratio And How It Is Calculated

What is the calculation of the debt to income ratio

Before you apply for a home real estate loan you should know how to calculate your debt-to-income ratios. I will explain below how to do this. If your debt to income ratio is too high it might be time for you to stop and look at your finances. You could be on your job for 18 years, have a great credit score, and have lots of money in the bank. But if your debt to income ratio is too high you will not get approved for the home loan in most cases.

There are exceptions when you have compensating factors involved. Remember to take how much you qualify versus how much you can afford into consideration when shopping for a home. How much you qualify is how mortgage underwriters determine the maximum you qualify for a mortgage from the DTI they come up with. However, how much house you can afford will take into your actual personal expenses that do not report on the credit bureaus. Mortgage underwriters will not take personal expenses including utilities when calculating debt to income ratio. You do not want to buy too much house and not have the ability to repay your mortgage.

What Is Debt To Income Ratio

Your debt-to-income ratio is a percentage of how much money you have allocated to your housing payment and other debts. You can calculate your Debt to income ratio by adding up your monthly minimum debt payments and dividing it by your monthly gross income. All mortgage lenders have a maximum debt to income ratio you are allowed to have depending on the type of loan you are applying for. The lower your debt to income ratio the better off you are. Lower debt to income ratio indicates how much of a risk you are in default on your home loan.

Understanding Debt To Income Ratio: Front End And Back End DTI

What is the Front End And Back End DTI

Lenders have a front-end ratio also called the housing ratio and a back-end ratio. Front end ratio is your new mortgage payment which includes principal, interest, tax, homeowner’s insurance, mortgage insurance, and homeowners association monthly fee. A low front-end DTI is considered to have this below 31% in most cases. Your back-end ratio includes the same plus minimum monthly payments that are recorded on your credit reports such as credit cards, student loans, child support, auto loans, and personal loans. Low back-end debt to income ratios is when borrowers have lower than 43% DTI. However, the maximum DTI allowed is substantially higher which we will discuss in the following paragraphs. To calculate your debt to income ratio you will need to add together all of your monthly debts and then divide it by your gross income.  You will not include utility bills, health insurance, groceries, entertainment, or commuting cost.

Agency Maximum Debt To Income Ratio Guidelines

Every mortgage loan program has its own maximum agency mortgage guidelines on debt to income ratio. Fannie Mae and Freddie Mac will allow up to a 50% DTI cap to get an approve/eligible per automated underwriting system (AUS) on conventional loans. Fannie Mae and Freddie Mac do not have a maximum front-end debt to income ratio cap. To get an approve/eligible per AUS on FHA loans, the maximum front-end DTI cannot exceed 46.9% and the maximum DTI cannot exceed 56.9%. The Veterans Administration (VA) has no maximum debt to income ratio caps on VA loans as long as you can get an approve/eligible per automated underwriting system. At Capital Lending Network, Inc., we have gotten automated approval with over a 65% DTI on VA loans. The key in getting an automated approval per AUS on higher debt-to-income ratios is strong residual income. VA loans are insured by the Department of Veterans Affairs. Debt to income ratio caps on non-QM loans depends on the wholesale lender. Most non-QM lenders will cap the debt to income ratio at 50% DTI.

Difference Between Manual Versus Automated Underwriting System Approval

What is the difference between manual approval and an automated risk assessment system

If borrowers cannot get approve/eligible per the automated underwriting system and gets a refer/eligible, the file can be downgraded to a manual underwrite. There are only two mortgage programs that allow for manual underwriting. VA and FHA Loans. What manual underwriting means is the automated underwriting system determines the borrower is eligible but cannot render an automated approval from the data of the borrower. However, the borrower can get approved through a manual underwrite. The only major difference between a manual versus automated underwrite is a human mortgage underwriter will thoroughly review and underwrite the file. The debt to income ratios on a manual underwrite are normally capped at 50% DTI with at least two compensating factors. Compensating Factors play an important role in debt to income ratio on manual underwriting.

Debt To Income Ratio Caps On Manual Underwriting

Debt to income ratio caps on manual underwriting depends on the number of compensating factors the borrower has. Compensating factors are positive factors such as the following:

  • Low payment shock is the difference in the new housing payment versus the rent the borrower used to pay
  • Three months of reserves (P.I.T.I.) is considered a compensating factor
  • Income from a part-time job and/or other consistent income the borrower earned for at least 12 months but not used as qualifying income
  • History of the borrower saving money over the course of the past two or more years
  • Non-borrower spouse with a full-time job
  • History of the borrower excelling in their job/career such as consistent promotions and/or pay raises and/or getting advanced degrees

Here is how the debt-to-income ratios on manual underwriting are determined. With zero compensating factor, the maximum front-end DTI is 31% and the maximum DTI is 43%. With one compensating factor, the maximum front-end DTI is 37% and a back-end DTI is 47%. With two compensating factors, the maximum front-end DTI is 40% and the back-end DTI is 50%. Manual underwriting guidelines are the same for FHA and VA loans. The mortgage underwriter has a lot of discretion on manual underwrites. Mortgage underwriters can exceed the DTI caps via underwriter discretion on manual underwrites for borrowers with strong compensating factors.


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Maureen Anne Taylor November 24, 2020 - 9:37 pm

Well my credit score is 627. I am trying to get a loan on a house that is $242,000. My lender from Zillow says I don’t qualify due to refer findings making it unlikely I can get a loan. I really am tired of renting and after reading this article on Capital Lending Network, I am ready to pursue my dream of owning a home and turn that into a reality. Do you think you can help me qualify for a mortgage? I have a lot of money saved. I am make $60,000 a year as a deputy sheriff and have been with the Sheriff’s Department for 18 years. I have strong job stability and make a lot of overtime which I am not including. I guess the loan program I need to qualify is an FHA loan. I just completed my request for a loan officer to get back to me on the APPLY NOW icon on top of this website. I like to thank you in advance. Thank you.
Maureen Taylor

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[…] One of the hurdles facing many homebuyers is running into high debt to income ratio […]


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