Very High DTI / Fair Credit / Minimal Cash - Will I qualify for FHA?

[trnl2016]

Hi everyone,

Long time lurker here in the mortgage boards. I found a really cute townhome in my neighborhood, which got me thinking... what will it take for me and my husband to qualify for an FHA loan? We haven't really been preparing for it, so we're not in a good position... but looking for advice. 

I'd prefer to put as LITTLE DOWN as possible (3.5%) because I want to use any extra cash we might have to cover closing and other expenses, as well as to pay down any debts that the bank suggests that would help us get approved.

P.S. Even though, on paper, we are well beyond our limits... the mortgage on this townhome would be about $700/mo less expensive than the rent we're currently paying.

1. Mortgage Credit Scores

• • The lower middle score between my husband and I is 653 (Experian FICO 2)
  • Reasons:
    • You have a serious delinquency (60 days past due or greater) or derogatory indicator on your credit report.
    • You've made heavy use of your available revolving credit.
    • You have one or more accounts showing missed payments or derogatory indicators.
    • You have too many credit accounts with balances.

2. Credit Report Negatives

• Navient (28 late payments)
  • (3) 90-day lates, (1) 120 day late each = 4 lates on each account
  • 7 accounts, 4 late payments each = 28 total late payments
  • Dates: 12/12, 01/13, 02/13, 03/13 (late 2012/early 2013)
  • Reason: Didn’t realize loans had come out of deferment

3. Gross Income

• $125,000 / yr (combined with spouse)

4. Source of income

• Employment only

5. Monthly debt payments

• Revolving: $1,164
• Car Payments: $410
• Personal Loans: $1,750
• Student Loans (Me): $31,000 (Graduated Repayment - $155/mo)
• Student Loans (Husband): $72,000 (IBR - $367/mo)
• TOTAL: $3,324 revolving/installment + $1,040 student loans at 1% (I think this is what we're supposed to calculate, right??) = $4,364/mo

6. Employment

• Me: W-2 employment, 3 yr 11 mo with company/industry
• Husband: W-2 employment, 2 yr 2 mo with company/industry

7. Assets/Reserves

• Savings: $12,000
• 401(k): $7,850 (Me), $10,600 (Husband)

8. Location

• Austin, TX - Travis County

9. Property Description

• Condo/Townhome, residential, built 1984

10. Property Value

• $140,000

11. Occupancy

• Primary residence for me and husband (no kids)

12. Transaction Type

• First home mortgage

[NC_Mtg_Loaner]

With your income level you really shouldn't have too much difficulty making this all work, but I'd recommend focusing on how to get your credit score higher if you can since it might only take a short period of time to do so--maybe even attainable by opening one new revolving credit card account and utilizing it sparingly...

Meanwhile, work to save an extra 1.5% so that you can go conventional if possible --this way you can avoid PMI for infinity with the FHA loan, but you'll really want to get your credit score above 680 in order to benefit with Conventional loan APR being better than FHA APR, but that's really just the icing on the cake because you should just go for it either way.

[trnl2016]

Thanks for your input, NC_Mtg_Loaner. So do you not think the high DTI is an issue? I could probably use $5,000 to bring down my debt. It would probably lift my score a bit, but it won't really make a dent in my DTI (maybe $100 less), which is the part that concerns me most.

[Anonymous]

Hey there!

My name is Audrey and I am a local lender in the DFW area. The FHA loan is great loan program, especially for first time homebuyers as it only requires 3.5% down and has a bit looser guidelines in terms of qualifying. It allows credit scores down to a 580 and the DTI ratio is capped at 55% (this is what my company allows in terms of qualifying)

The tricky thing about condo’s is very FEW condo’s are approved by HUD so most condo’s HAVE to have conventional (fannie/freddie) backed financing. To acquire FHA financing for a condo, the condo must be approved by HUD and on their “approved list.” I cannot speak for the Austin area but in DFW there are very few that are HUD approved. If you have the address I can look it up for you.

The other hurdle with condo’s is they all carry HOA dues and those dues can be $100’s of dollars every month which can move your total monthly payment from $700 to $900+. This HOA fee can potentially bust a tight DTI ratio…

The good news is you can do conventional and my company does offer 3% down conventional financing. Buuuut, conventional loan DTI is capped at 45% (sometimes we can get up to 50% depending on scenario) Plus, I typically do not recommend it for anyone with less than 700 credit score because mortgage insurance can get expensive!

1. A 653 is enough to qualify, although I will say that a mortgage score is scored differently than say Experian or sites like it, such as CreditKarma. From my experience, mortgage score’s are typically 10-20 points lower than the score reflected on Experian. Still would be enough for you to qualify based on your 653.

2. The late payments are okay since your current student loans account are now current.

5. Student Loan debt: For an FHA loan lenders have to use 1% of the loan amount. IF you can show a fully amortized amount that is less, we can use that as long as their is proper documentation to support that amount.

From what you said, your revolving debt is calculated correct at $4,364. With $125,000 gross annual income this put your roughly at $10,000 per month. Are you both salary? No odd deductions on taxes? 

What you can afford: 

• FHA loan your max mortgage payment you can afford = $1,130 (this would be at 55%)
• Your monthly mortgage payment consist of 4 things (typically..)
  1. Principal and Interest
  2. Homeowners Insurance (this is usually cheaper for condos)
  3. Mortgage insurance (required for FHA; required for Conventional if you put less than 20% down)
  4. Property taxes (varies for each property, set by the county and can move your monthly payment dramatically!)
  5. In this case HOA dues will also be included.

6. Employment looks good - need two years.

Here’s a quick scenario estimated based on this property with a purchase price of $140,000

Estimated Monthly payment: $1,275

Principal and Interest: $744.00 (condo’s usually come with a wee bit higher rate)

Hazard Insurance: $50.00

Taxes: $280

HOA dues: $200

10. For $140,000 purchase price with 3.5% down you total cash to close would be around $10,000 (I estimate high to leave a buffer but will likely be close to $9,000)

Down payment = $4,900 (conv loan 5% down would be $7,000)

Closing Cost = $4-5,000

My advice:

1. How much do you have left to pay on your car? If it’s less than $10,000 than my advice is to use your savings towards paying off your car so that payment does not have to be accounted for in your DTI. This would give you more room for purchase price/monthly mortgage payment.
2. If you really want this condo the first thing to find out is if it is approved by HUD for FHA financing. I can look this up for you if needed, i just need the address. I can also look up the property taxes with the address. 
3. If this condo is not approved by HUD than see if you can purchase with conventional financing - the way to do this is to get the numbers exact and see what you can do to pay down debt to lower your DTI ratio to qualify for conventional.
4. If you don’t end up going the condo route, than FHA is the likely the best option for you and with your current debt load the max monthly payment could you afford would be around $1,100-200 (depending on property taxes). If car can be paid off then your max mortgage payment could move up to around $1400-$1500.

These numbers are all estimates and I am more than happy to take a closer look at your exact scenario and give you better answer in terms of qualifying but I hope I was able to help a little bit… If you have any questions, just let me know or feel free to DM me and I can send you my number/email.

[trnl2016]

Hi Audrey, wow! Thank you for your very detailed response! I sent you a private message with more info.