Mortgage With High Debt-To-Income Ratio Lending Guidelines
In this article, we will be covering qualifying for a mortgage with high debt-to-income ratio. Debt-to-income ratios is probably the most important factor when it comes to qualifying for a mortgage loan. Qualifying for mortgage with high debt-to-income ratio can become an issue no matter which mortgage loan program borrowers choose.
The debt-to-income ratio is the total monthly minimum payments divided by the borrower’s monthly gross income. The result is the debt -to-income ratio. Every mortgage loan program has maximum debt-to-income ratios allowed. Each mortgage loan program has its own debt-to-income ratio cap.
HUD sets the maximum front-end debt-to-income ratio cap at 46.9% and back-end DTI cap at 56.9%. For conventional loans, there is no front-end debt-to-income ratio cap. The maximum debt-to-income ratio permitted on conventional loans is 50%. The debt-to-income ratio is that the sum of all of the borrower’s monthly minimum debt payments including the proposed monthly principal, interest, taxes, and insurance payments of the new home, divided by the borrower’s monthly gross income. On conventional loans, the debt-to-income ratio cannot exceed 50% DTI. In a case scenario, a borrower who grosses $10,000 per month cannot have monthly total debts exceeding $5,000 per month which includes the borrower’s proposed new housing payments and escrows.
Mortgage With High Debt-To-Income on Conventional Loans
As mentioned earlier, conventional loan programs limit the debt-to-income ratio caps to 50% in order to get an approve/eligible per automated underwriting system. There are two types of debt-to-income ratios:
- The front-end debt-to-income ratios
- Back-end debt-to-income ratios
The front-end debt-to-income ratios is the monthly principal, interest, taxes, and insurance payments divided by the borrower’s monthly gross income. The principal, interest, taxes, and insurance is also referred to as PITI.
Front-End and Back-End Debt-To-Income Ratios
There are two types of debt-to-income ratios. The front-end debt-to-income ratio is commonly referred to as the housing ratio. There is no front-end debt-to-income ratio requirements on conventional loans. The back-end debt-t0-income ratio is the housing expenses plus the overall borrower’s monthly debt obligations divided by the borrower’s gross income.
The back-end debt-to-income ratio is calculated by taking the PITI *principal, interest, tax, insurance), plus all other minimum monthly debt payments such as minimum credit card payments, automobile payments, student loan payments, alimony payments, child support payments, and any other monthly obligations that are reported to the credit reporting agencies divided by the borrower’s monthly gross income.
Again, the maximum debt-to-income ratios required to get a conventional loan approval per automated underwriting system cannot be greater than 50%. Debt-to-income ratios is also referred to as DTI.
HUD Debt-To-Income Ratio Guidelines on FHA Loans
FHA loans are much more generous when it comes to debt-to-income ratios. If the FHA loan borrower has credit scores of 620 or under, the maximum debt to income ratio is capped at 43%. If the mortgage loan borrower has credit scores of at least 620 or higher, then the maximum front-end debt to income ratio is capped at 46.9%. The maximum back-end debt to income ratios is capped at 56.9% in order to get an approve/eligible per automated underwriting system.
VA Debt-To-Income Ratio Guidelines
Debt to income ratios on VA loans depends on the automated findings from the automated underwriting system. The U.S. Department of Veterans Affairs (VA) does not require a minimum credit score requirement. There is no debt-to-income ratio caps on VA loans. However, most lenders will require 620 to 640 credit score requirements. Most lenders will cap debt-to-income ratios on VA loans at 43% to 50%. Gustan Cho Associates has no overlays on VA loans.
VA Mortgage With High Debt-To-Income Ratio
We have no credit score requirements nor DTI caps on VA loans. There are cases where debt-to-income ratios on VA loans can be as high as 60% debt-to-income ratios. This is if the automated underwriting system approves it due to compensating factors and residual income. To be on the safe side, having a 41% debt-to-income ratio on VA loans will yield an almost guarantee automated approval. VA loans are only for veterans with Certificate of Eligibility papers and VA loans do not require any down payment.
Qualifying For USDA Loans With High DTI
.USDA loans normally cap debt-to-income ratios at 29% front-end and 41% back-end. There are no down payment requirements on USDA loans. However, there is a maximum household income cap. To qualify for USDA loans, the property needs to be in a USDA area and borrowers need to meet USDA lending guidelines with regards to credit scores, income, and other lending guidelines.
Mortgage Lender Overlays on Debt-To-Income Ratios
Just because borrowers meet the maximum debt to income ratios permitted by the particular mortgage loan program does not mean they will be set with the lender. Lenders have what they call mortgage lender overlays. Overlays are additional guidelines set by individual lenders that surpass the minimum federal mortgage lending guidelines.
The maximum debt-to-income ratios permitted by HUD for borrowers with at least a 620 credit score is 46.9% front-end and 56.9% back-end to get an approve/eligible per automated underwriting system findings. However, most lenders may have overlays that may cap the back-end debt-to-income ratios between 43% to 50%.
Homebuyers or homeowners needing to qualify for a mortgage with a lender with no overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Borrowers can also email us at gcho@gustancho.com. We are available 7 days a week, late evenings, weekends, and holidays as well to answer any questions and help start the pre-approval process so buyers can be shopping for the home of their dreams.
