DTI Ratios - Are these acceptable?

[MBOhio2]

My student loan balance is outrageous so I worry when I start thinking about DTIs for purchasing a first home, which we hope to do in about 18 months after we pay off credit card debt and improve my credit scores.

If we only pay off our current credit card debt ($10K and working on it now), then our DTIs will be as follows:

Front-End (monthly debt payments + desired mortgage, divided by gross income) = 21.90%

Back-End (desired mortgage, divided by gross income) = 46.43%

These DTIs still include all of our student loan debt and a few other debts (personal loan, credit line) that we could, if required, pay off to lower the back-end DTI. First, have I used the correct formulas above? It's truly as simple as that, correct? Second, from what I've read, FHA mortgages have a maximum back-end DTI of 43%, correct? Assuming everything else is in order, if I can lower our back-end DTI to 43%, what is everyone's opinion on whether we would be approved for an FHA loan?

If it's helpful, our monthly gross income is about $12K even. My husband has credit scores in the low 700s and while mine are in the 500s now, I am determined to get them up into the mid-high 600s in 18 months. We both have employment histories of at least 24 months. We will have no oustanding collections, judgments, etc. We plan to have a 5% downpayment.

[Anonymous]

Front-End (monthly debt payments + desired mortgage, divided by gross income) = 21.90%

Back-End (desired mortgage, divided by gross income) = 46.43%

You have some confusion here, it may be bad news when factoring in your ratios.

Front end is the proposed mortgage payment, insurance, and taxes combined (known as PITI) divided by your gross.

Back end is the proposed mortgage payment, insurance, taxes (known as PITI), PLUS credit cards, loans, and any trade line reported to the Credit Agency that has a minimum monthly payment. In general unless you are free of derogs on the credit reports, and have reserves(may not be required, but will certainly help) lenders generally do not like to go over their back end guidelines.

43% is a guideline for FHA only not a lender guideline. Being lender specific, I know people who got a VA/FHA with 55% percent back ratios, but a credit score over 750 as well. I would suggest finding the lender you would like to have a mortgage with and find out what is the max guidelines.

So with that said, what would your new back end be?

yesme

[MBOhio2]

Thanks for replying yesme. I should have been more specific when I stated the formula I used for DTI - yes, I did include the full PITI when calculating the DTIs listed above so they are accurate based on all of our non-CC debt and total gross income. Though actually, I just added in a raise I'll be getting any day and income that my husband gets from a second job that I sort of forgot about (totally legit, have W-2s, etc) and the revised version are as follows:

Front-End = 19.86%

Back-End = 45.15%

Again, I could get those lower if I paid off some additional debt, but I would prefer to save that money toward a down-payment instead.

Soooo.... based on the below, are you saying that some lenders are more flexible and allow a higher back-end DTI? However, if I want an FHA loan, the maximum is 43%, correct? If so, it looks like I will have to pay down a little more debt, but it's not too much to get it within the 43%.

One more thing... with an FHA loan, do some lenders require the back-end ratios to be even lower than te 43%, for example, for borrowers with less-than-stellar, mid-600 credit scores would they decrease the allowable back-end ratio?

[Heavanly1]

As yesme stated, FHA only recommends a back-end DTI of 43%. Many lenders are willing to go as high as 50-55% with a FHA loan based upon your credit score, reserves, etc.  I'm currently under contract on my first home, will be using a FHA loan, and will have a back-end DTI of 40%. During the negotations of the sale price, my loan officer told me he could approved me for up to a back-end DTI of 50%, but that wasn't something I was comfortable paying, so I declined.

You also stated that your husband's 2nd part-time job was included in your DTI calculations. I'd be more concerned about whether your lender will actually count that income when computing your ratios. I had a friend who recently purchased her first home; she was told by her lender that her part-time income from her second job would not be counted unless it was a salaried position (versus hourly). You  might want to talk to your loan officer about the specifics of counting the second part time job's income.

[Anonymous]

part time job needs 2 years of w2

Raise (unless salary) will be either not be counted or hourly type wage will be averaged over 2 years.

SOme lenders will do higher DTI, but generally they want to see large down payment, high FICO, and/or high reserves.

What ever happened with the student loan issues.  You can get excited all you want about DTI, but if those student loans are still charged off they are still going to have to be dealt with.

I only say that because having a discussion about high DTI when the loans are the main thing affecting it, and the loans were charged off and are likely to have to be either paid off or seriously reduced is somewhat pointless.  When you have the loans to a better standing, it will affect your DTI quite a bit.  That said, I am very curious if you got any help from the SL people becuase once again, no mortgage is going to happen until those SL's show either paid or paying as agreed. 

[MBOhio2]

heavenly - Thanks for clarifying. I thought lenders would go higher for non-FHA loans but that FHA had a firm ceiling of 43%. Good to know that there's more flexibility for FHA back-end, but the more I look at our #s, I think we'll definitely be under 43%.

To be more clear, my husband's "part-time" job is as a high school football coach. It's a salaried position memorialized through an official contract with the school and he has done it for 4 years now, so providing 2 years of W-2s is no problem.

My raise will be to my salary. I currently make $102K and I anticipate I will make between $105-106K as soon as I receive my official raise in about 2 weeks. And actually, by the time we are ready to buy a home (hoping for June 2012), I will have another raise so my salary should be a little closer to $110K, which brings the DTI ratios down even more.

mickie - Since you don't want me to get excited, please allow me to explain...

Yes, some of my loans charged off, but not all of them did. The debt included in the above back-end DTI includes both my non-CO and CO loans - I am paying on ALL of my SLs right now. I have entered into formal payment agreements for the CO loans. I plan to PFD a few of the CO loans because the balances are something I can just pay off out of pocket (I have a feeling they will accept PFD). For the CO loans with higher balances, I have been told by multiple lenders that if all other factors are positive (solid employment,  reasonable DTI, good credit scores, high down payment, reserves, etc), then I will be able to be approved for a mortgage loan as long as I can evidence a formal payment agreement on the CO loans and that I have been making payments on time for at least 12 months under that payment agreement. I will continue to see if I can work with the original creditor to settle the amounts and get them paid off, etc, but I'm being told that simply having charge-offs with balances will not knock me out of the game altogether.

[Anonymous]

I wish you the best of luck but am extremely skeptical becuase of 2 things... Student loan almost always have to either be current or rehabbed showing current. Second charge offs of that amount almost always have to be paid. Not to say it is impossible and that things may not work out, but alot of LO's will tell you things like what you stated. Whne you hear things like "won't necessarily keep you from" that is usually double talk typically meaning either I don't know the answer, I have not dealt with this before, or I am willing to submit an application hoping for approval because if I don't at least try, I make no money.

Again, not to say that is the issue, but anyone who can answer that question when the loans have just now went into repayment, the status of the accounts and such are still very much up in the air, and your DTI is impossible to determine right now as it will depend on what you pay down, what rates are in a year from now (and they could easily be 7+% by then which would be much more historically normal, etc...  I guess my point is any discussion either on the board here about DTI or even with an LO is a totally hypothetical conversation that is allowing for a couple big leaps of faith due to the charge offs.  I see many people on here get told all kind of great news or plans on how to buy homes from LO's when there is stuff right in front of them that is going to get them denied by the UW.  But, the LO officers job is to put files in fornt of the UW, not guarantee them getting approved.  Again, I wish you the best, but If I were in your shoes I would wait until I had the 12 months of payment before I really even thought too much about buying becuase too many things are going to change in the meantime.  Now, hitting the rebuilding boards would have numerous benefits but, and this is just my opinion, spending the next year stressing or worrying about all the minutae of home buying when you have no idea if they are even goign to let you in a year is just wasting your time and energy.  I would wait till I had the 12 months, the go for a pre-approval (demanding full UW approval ahead of time to clarify the SL issues so they are not an issue), and then buy a home.  Try to get some moeny saved up as reserves because with charge off's like that, rehab'd or not, they are going to want to see reserves to help offset the bad credit.

Anyway, to each their own and I do wish you good luck with it all. 

[mauve]

Mickie, she's active on the Rebuilding boards.  I think she's like me, trying to prepare herself in every way she can think of - like "OK, if I can get my score up through this, this, and this, how is my DTI going to work?  Would I be better off accelerating SL payments or CC payments to be where I need to be?  Would it be better to pay off some of the SLs to make sure the DTI works, or should I focus on the utilization?"  etc.

[MBOhio2]

Exactly, mauve.

By no means am I stressing out now and nor will I be for the next year. However, I certainly can't buy a house if I ignore my current credit report problems and I don't do everyhting possible to put myself in the best position to be approved. One of those things is making sure I know the DTI rules, know my current DTIs and know what will happen to my DTIs if I do X, Y and Z. I understand that there are 100 variables, so I'm trying to control as many as possible. In 18 months, when I'm financially ready to buy (no CC debt, have a downpayment, reserves, etc), then I'll re-assess the facts and go from there. For example, if interest rates go up, then I need to buy a less expensive home, etc.

I'm not looking for any guarantees here... just trying to make sure I understand the rules of mortgage approval and put myself in the best position. If it turns out that 100% of my charged-off loans must be paid in full... then I pay them off and buy a house a year later. If I work hard toward the goal, it will work out in the end