Working on debt to income ratio

[Anonymous]

I'm at that point in my life where I'd like to own my own home.   My timeline for buying a house would be around next summer or slightly before the summer.  I had applied to get a pre-approval not long ago but I didn't like the high interest rate.   I feel that my credit score in the upper 700s is high enough for better rates and what I was told was my debt to income ratio was too high.

I'm self employed and I've been working on lowering my debt to income ratio.   I paid about 40% of a car loan and then I refinanced it and that reduced my payment to about half.  I'm planning to do that again in about 6 months with the other car.    Does anyone know what the debt to income ratio is that they are looking for?   Do they add in the potential payment of the mortgage and then use that to judge if the debt to income ratio is good or bad?

[Spider07]

There are two differnt ratios that are important, your front end and back end ratios.  Front end is how much you can afford for a house payment.  Typically 31% is the max.  So take your gross income and multiply by 31% and that is the highest house payment you can have.  The back end is everything added together.  So all your installment accounts and revoling accounts, car payments, credit cards, student loans, etc plus your potential house payment including Mortgage, interest taxes and insurance.  For the very best rates, they like that number no higher than 36% but you can get approved with a much higher dti, up to 50% convential loans and I think around 55% for fha loans. 

[Anonymous]

Depends on the loan type- USDA guaranteed is 29/41.

[StartingOver10]

If you get a conventional loan the allowed ratios are lower than if you get a FHA loan. The ratios are different for VA and for USDA loans.  The most generous ratios are for FHA loans - 46.99% for the front end ratio (could be 45.99% ) and for the total debt ratio (back end ratio) the max is 56.99%.  Total debt ratio includes your housing payment and the monthly payments for your other debt (installment loans, revolving and student loans).  

Each lender can set their own maximum ratios which are lower than the ratios allowed by Fannie Mae or Freddie Mac (conventional loans) or HUD (FHA loans).  the lender can only reduce the allowed ratios - not increase them.  [A portfolio loan is completely different and can have different ratios but they are not common. Most of the portfolio loans i have seen in the last couple of years follow Fannie or Freddie guidelines. That doesn't mean you can't find one that is different.]

The general maximum total debt ratio for a conventional loan is 43% to 45%, unless the lender has an overlay that reduces the max amount. 

What type of loan are you seeking? 

Self-employed is more difficult because many self employed people have a tendancy to maximize their deductions which may not leave enough income to qualify for any mortgage. The lenders want you to be able to repay the loan so they check your tax returns to determine your actual income. 

Talk to your LO and find out what their maximum ratios are for the type of mortgage loan you are seeking.

As a general rule - banks are more restrictive than lenders that only do mortgage loans. That's why you need to speak with the LO, find out exactly what their criteria is...if they won't tell you, then walk away and find someone that is more helpful.

[kc0039]

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@Anonymous wrote:
Depends on the loan type- USDA guaranteed is 29/41.

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USDA can be 33/50 with compensating factors

[Anonymous]

I will look through the handbook again.  

[Anonymous]

11.3 DEBT RATIO WAIVERS AND COMPENSATING FACTORS
An applicant’s PITI ratio may exceed 29 percent and the Total Debt ratio may exceed 41 percent if the lender determines that strong compensating factors demonstrate that the household has higher repayment ability.
A. Debt ratio waivers for purchase transactions
Manually underwritten loans – purchase transactions. Agency approval of a lender’s request for debt ratio waiver may be granted if the following conditions are met:
1. Acceptable ratio thresholds are met:
a. The PITI ratio is greater than 29 percent, but less than or equal to 32 percent, accompanied by a TD ratio not exceeding 44 percent; or
b. The TD ratio is greater than 41 percent, but less than or equal to 44 percent, accompanied by a PITI ratio not exceeding 32 percent;
And:
2. The credit score of all applicant(s) is 680 or greater;
And:
3. At least one of the acceptable compensating factors listed below is identified and supporting documentation is provided to the Agency.
Acceptable Compensating Factors and Supporting Documentation:
 The proposed PITI is equal to or less than the applicant’s current verified housing expense for the 12 month period preceding loan application. Verification of housing expenses may be documented on a verification of rent (VOR) or credit report as noted in Chapter 10, 10.13. The VOR or credit report must include the actual payment amount due and report no late payments or delinquency for the previous 12 months. Rent or mortgage payment histories from a family member will not be considered unless 12 months of canceled checks, money order receipts, or electronic payment confirmations are provided. A history of less than 12 months will not be considered an acceptable compensating factor.
11-6
 Accumulated savings or cash reserves available post loan closing are equal to or greater than 3 months of PITI payments. A verification of deposit (VOD) or two most recent consecutive bank statements document the average balance held by the applicant are required as noted in Chapter 9, 9.3. Cash on hand is not eligible for consideration as a compensating factor.
 The applicant(s) (all employed applicants) has been continuously employed with their current primary employer for a minimum of 2 years. A “Request for Verification of Employment” (VOE) (Form RD 1910-5, comparable HUD/FHA/VA or Fannie Mae form, or other equivalent), or VOEs prepared by an employment verification service (e.g., The Work Number.) must be provided. This compensating factor is not applicable for self-employed applicants.
Debt Ratio Waiver Request and Agency Approval:
Debt ratio waivers must be requested and documented by the approved lender. The lender requests Agency concurrence with the debt ratio waiver by submitting a signed underwriting analysis that cites one or more of the above acceptable compensating factors. Lenders may utilize Fannie Mae 1008 / Freddie Mac 1077, “Uniform Underwriting and Transmittal Summary,” or similar form. Evidence of the compensating factor, such as a VOR, VOD, and/or VOE, must be submitted to the Agency for approval.
GUS underwritten loans receiving an “Accept.” GUS files that receive an “Accept” underwriting recommendation or an “Accept” underwriting recommendation that requires a “Full Documentation” loan submission as part of a quality control message on the GUS Underwriting and Findings Report do not require debt ratio waiver requests.



Interesting very interesting, learn something new everyday.

[Anonymous]

Does that mean for a conventional loan to avoid having issues the two debt ratios are 29% and 41%.   The 29% is the mortgage alone and the 41% is with all other debts factored in.

[Anonymous]

Hmmm...I thought Fannie Mae's DTI was 43% on the back-end. 

Here is the July 2017 eligibility matrix from Fannie's website: https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf

[StartingOver10]

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@Anonymous wrote:

Hmmm...I thought Fannie Mae's DTI was 43% on the back-end. 

Here is the July 2017 eligibility matrix from Fannie's website: https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf

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It was 43%.  I regularly saw approvals to 45% and now up to 50%.

Quote below from this link https://www.housingwire.com/articles/40382-fannie-mae-raises-debt-to-income-ratio-to-further-expand-mortgage-lending :

But here’s some good news: The country’s largest source of mortgage money, Fannie Mae, soon plans to ease its debt-to-income (DTI) requirements, potentially opening the door to home-purchase mortgages for large numbers of new buyers. Fannie will be raising its DTI ceiling from the current 45 percent to 50 percent as of July 29.

DTI is a borrower’s total amount of debt, including credit cards, student loans, auto loans and mortgages, versus their total income. However, Fannie Mae might be increasing its DTI ratio, but qualified mortgages still need a DTI of 43%.

But how safe will these new loans be? Many have reservations about lending at higher DTIs. But according to Fannie Mae, there is nothing to worry about when increasing the DTI from 45% to 50%.

From the article:

Using data spanning nearly a decade and a half, Fannie’s researchers analyzed borrowers with DTIs in the 45 percent to 50 percent range and found that a significant number of them actually have good credit and are not prone to default.

Source: The Washington Post