topic Re: What is a realistic estimate for debt to income ratio? in Mortgage Loans

What is a realistic estimate for debt to income ratio?

John00 — Wed, 03 Aug 2022 03:58:32 GMT

Hi, I'm looking to apply for a mortgage in the next year or two and trying to plan out how much income I will need to qualify for a home in the 400,000 range.

I see so much different information online regarding debt to income ratios. Some say 28%, some say 36% and some say up to 50%. I understand there are front end and back end ratios but why are there no clear answers on this? Looking for a little direction to make sure my income is high enough to qualify for the home price I would want to afford.

Thanks!!

Re: What is a realistic estimate for debt to income ratio?

lucknpat — Wed, 03 Aug 2022 04:57:12 GMT

Hi @John00 I can tell you that interest rates affect your purchasing power. While the income to debt ratio is also considered the interest rates really affect your purchasing amount. The lower the rate the more you can afford to buy. As rates go up, the amount of home you can afford goes down. My husband and I just went through this and I wish I would've known that.

And as far as your question regarding debt to income ratio. That depends on if you get an FHA loan or a conventional loan. FHA allows for a higher ratio than conventional. Not all lenders are equal, definitely shop around when you go to look for a mortgage. We started out with one lender and then we switched to another one that is awesome and is better at getting lower rates. Hopefully someone can give you an idea about the realistic ratios for conventional, I believe it's 50%. FHA is 57% on a case by case basis.

Re: What is a realistic estimate for debt to income ratio?

ShanetheMortgageMan — Wed, 03 Aug 2022 08:03:53 GMT

The max debt ratios depend on the loan program. There are two portions of your debt ratio, the front (housing) which is the percentage of your gross income that your proposed primary housing payment represents & then there is the back (total) which is the percentage of gross income when adding in all of your other monthly debt payments (credit cards, personal loans, student loans, automobile payments, other mortgages/properties, etc.).

For both, with an automated underwriting approval, conventional can get approved up to 49.99% with Fannie Mae financing and 50.49% with Freddie Mac financing. Debt ratios over 45% will usually need to have reserves, solid credit, and/or money down. Lenders usually do not manually underwrite Fannie/Freddie.

For FHA with an automated underwriting approval the max housing ratio is 46.99% and the max total debt ratio is 56.99% If your loan needs to be manually underwritten then the max ratios are 40/50%.

With VA there isn't a maximum if approved through automated underwriting, but higher debt ratios (from experience over 45%) will need to have at least 120% of the residual income requirement based on family size/location (usually is met by most) + often will need reserves, solid credit, and/or putting money down. If manually underwritten then the max for both is 50%, but you'll see a lot of lenders max out at 41% due to not wanting to take risks.

With USDA and an approval through their automated underwriting system, a housing ratio up to 34% and a total debt ratio up to 46% can qualify. Manually underwritten loans have max debt ratio of 32% & 44% (680 score required + compensating factors).

Ex. if you have $120k/year of income ($10k/mo) and your new mortgage payment is $3,200/mo and you have a car payment of $450/mo, student loans of $200/mo, $175/mo personal loan and credit cards of $150/mo then the housing ratio would be 32% & total debt ratio would be 41.75%.

Re: What is a realistic estimate for debt to income ratio?

disdreamin — Wed, 03 Aug 2022 14:56:51 GMT

I just want to point out that taxes and insurance, which vary wildly depending on location, also need to be taken into consideration. I think those are another reason it is difficult to give a one-size-fits-all answer to "how much salary do I need to afford a house that costs $X?"

Re: What is a realistic estimate for debt to income ratio?

ShanetheMortgageMan — Wed, 03 Aug 2022 17:00:06 GMT

Definitely, you also need to include any homeowner's association (HOA) dues as well. Property tax calculations for mortgages vary depending on the state, here in California lenders use a calculation equal to 1.25% of the sales price but most other states will use the current amount of property taxes (assuming it's been assessed as improved property) to calculate. County treasurer/tax collector offices can provide property tax info. Homeowner's insurance quotes can be obtained online to give a rough idea of what it might actually be once you take the next step and apply for homeowner's insurance. HOA dues are often mentioned in the MLS listings.

Re: What is a realistic estimate for debt to income ratio?

John00 — Thu, 04 Aug 2022 02:52:07 GMT

@ShanetheMortgageMan wrote:
The max debt ratios depend on the loan program. There are two portions of your debt ratio, the front (housing) which is the percentage of your gross income that your proposed primary housing payment represents & then there is the back (total) which is the percentage of gross income when adding in all of your other monthly debt payments (credit cards, personal loans, student loans, automobile payments, other mortgages/properties, etc.).

For both, with an automated underwriting approval, conventional can get approved up to 49.99% with Fannie Mae financing and 50.49% with Freddie Mac financing. Debt ratios over 45% will usually need to have reserves, solid credit, and/or money down. Lenders usually do not manually underwrite Fannie/Freddie.

For FHA with an automated underwriting approval the max housing ratio is 46.99% and the max total debt ratio is 56.99% If your loan needs to be manually underwritten then the max ratios are 40/50%.

With VA there isn't a maximum if approved through automated underwriting, but higher debt ratios (from experience over 45%) will need to have at least 120% of the residual income requirement based on family size/location (usually is met by most) + often will need reserves, solid credit, and/or putting money down. If manually underwritten then the max for both is 50%, but you'll see a lot of lenders max out at 41% due to not wanting to take risks.

With USDA and an approval through their automated underwriting system, a housing ratio up to 34% and a total debt ratio up to 46% can qualify. Manually underwritten loans have max debt ratio of 32% & 44% (680 score required + compensating factors).

Ex. if you have $120k/year of income ($10k/mo) and your new mortgage payment is $3,200/mo and you have a car payment of $450/mo, student loans of $200/mo, $175/mo personal loan and credit cards of $150/mo then the housing ratio would be 32% & total debt ratio would be 41.75%.

Thank you for spending the time to explain all of this! In what situations would a mortgage need to be manually underwritten? And if there is very little or no other debt in addition to the mortgage, are they more flexible with the front ratio?

Re: What is a realistic estimate for debt to income ratio?

ShanetheMortgageMan — Thu, 04 Aug 2022 06:08:26 GMT

No problem. Typically loans are manually underwritten if you are unable to get an automated underwriting approval. Manually underwritten loans are given more scrutiny and have more conservative guidelines that need to be met in order to be approved. Having little to no discretionary debt can be a compensating factor that help other riskier parts of someone's profile to qualify, like a higher housing ratio or scarce reserves or a lower credit score. The automated underwriting algorithms put most of their weight on credit. I've seen people with excellent credit (high scores, lots of tradelines with 2+ year histories) qualify at the highest debt ratios, lowest possible down payment and minimal reserves.

Re: What is a realistic estimate for debt to income ratio?

bobnathan0295 — Fri, 19 Aug 2022 19:40:08 GMT

It helps to have good balances on 401k/IRA accounts

Re: What is a realistic estimate for debt to income ratio?

ShanetheMortgageMan — Sat, 20 Aug 2022 06:24:41 GMT

@bobnathan0295 wrote:
It helps to have good balances on 401k/IRA accounts

Yup, 60-70% of the vested balance of retirement accounts can qualify + nearly all other types of liquid assets.

Re: What is a realistic estimate for debt to income ratio?

IamWesty12 — Wed, 24 Aug 2022 15:07:12 GMT

@ShanetheMortgageMan wrote:
@bobnathan0295 wrote:
It helps to have good balances on 401k/IRA accounts

Yup, 60-70% of the vested balance of retirement accounts can qualify + nearly all other types of liquid assets.

Sorry to jump in our this convo w/ a post but @ShanetheMortgageMan can you please elaborate on the comment above as it relates to buying a home? Are you saying that if one has an IRA with a balance of say $55K that 60-70% of that can play into buying a house? I am a new hopefully sooner than later first time homebuyer who lives in Vermont w/ very little knowledge of the process. TY!

Re: What is a realistic estimate for debt to income ratio?

ShanetheMortgageMan — Wed, 24 Aug 2022 16:49:27 GMT

@IamWesty12 wrote:
Sorry to jump in our this convo w/ a post but @ShanetheMortgageMan can you please elaborate on the comment above as it relates to buying a home? Are you saying that if one has an IRA with a balance of say $55K that 60-70% of that can play into buying a house? I am a new hopefully sooner than later first time homebuyer who lives in Vermont w/ very little knowledge of the process. TY!

I actually got clarification from Fannie Mae that 100% of the vested balance of an IRA can be used as reserves. The 60-70% was their old guideline. If it's an employer related retirement account, then the terms and conditions of withdraw (often referred to as the Summary Plan Description) needs to be reviewed to determine exactly how much of the asset you'd have access to, so for example if you had a 401k and the terms/conditions said that only a $50k withdraw was allowed (and assuming the balance is at least $50k) then $50k could be used.

FHA still uses the 60% figure, unless there is conclusive documentation that a higher percentage may be withdrawn after subtracting any federal income tax and withdrawal penalties. USDA uses a flat 60%. VA doesn't specify a percentage, but lenders typically will use 60% of the vested balance minus any loan balances.

Re: What is a realistic estimate for debt to income ratio?

IamWesty12 — Thu, 25 Aug 2022 02:44:25 GMT

@ShanetheMortgageMan wrote:
@IamWesty12 wrote:
Sorry to jump in our this convo w/ a post but @ShanetheMortgageMan can you please elaborate on the comment above as it relates to buying a home? Are you saying that if one has an IRA with a balance of say $55K that 60-70% of that can play into buying a house? I am a new hopefully sooner than later first time homebuyer who lives in Vermont w/ very little knowledge of the process. TY!
I actually got clarification from Fannie Mae that 100% of the vested balance of an IRA can be used as reserves. The 60-70% was their old guideline. If it's an employer related retirement account, then the terms and conditions of withdraw (often referred to as the Summary Plan Description) needs to be reviewed to determine exactly how much of the asset you'd have access to, so for example if you had a 401k and the terms/conditions said that only a $50k withdraw was allowed (and assuming the balance is at least $50k) then $50k could be used.

FHA still uses the 60% figure, unless there is conclusive documentation that a higher percentage may be withdrawn after subtracting any federal income tax and withdrawal penalties. USDA uses a flat 60%. VA doesn't specify a percentage, but lenders typically will use 60% of the vested balance minus any loan balances.

@ShanetheMortgageMan wow, that is fantastic and thank you so much for clarifying in such a way that I could understand it. If I am probably going the conventional route (as my tri-merge is over 690) would this loan have the same option to use an IRA? TY again.

Re: What is a realistic estimate for debt to income ratio?

ShanetheMortgageMan — Thu, 25 Aug 2022 05:40:32 GMT

@IamWesty12 wrote:
@ShanetheMortgageMan wow, that is fantastic and thank you so much for clarifying in such a way that I could understand it. If I am probably going the conventional route (as my tri-merge is over 690) would this loan have the same option to use an IRA? TY again.

You're welcome. Conventional financing is typically Fannie Mae or Freddie Mac financing, so using an IRA as reserves would work.

Re: What is a realistic estimate for debt to income ratio?

CreditFun — Fri, 02 Sep 2022 17:14:03 GMT

In this market, risk managment is constantly changing.

The only way to know "for sure" is to have your credit pulled with a property under contract.