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Debt To Income and W-2 income for Mortgage Questions

OnMyWay84
Valued Member

Debt To Income and W-2 income for Mortgage Questions

Hello!

I am hoping to purchase my first home in the next 3 months. My middle mortgage FICO score is currently 608. I did an app with a mortgage lender recently and I was told in order for me to qualify I would have to have my car payment removed from my credit report--to lower my DTI. I currently owe around 8k on the auto loan and I'm not supposed to be done with the loan until May 2021.  Another thing that is taking up the bulk of my DTI is student loans. I currently owe about 135K, on a income driven repayment plan for 67/ month. My annual income is around 65K. The student loans I can't really do much about so that is what's really driving my DTI-- I believe that's why the lender advised me to get the car loan off my report.


1.Would it be best for me to go ahead and pay off the auto loan so it won't count towards my DTI? I am afraid paying it off completely will drop my score. Or should I pay it down to where I only have a few payments left? I have the money to pay it off, but it was my down payment if I needed to go the conventional route

2. What can I do to help boost my score? I have 4 credit cards, student loans ( I think monthly interest may be hurting my score) and the auto loan. I am currently working on getting the utilization down to 30% for the revolving acct, right now its hovering around 45%

3. Should I wait until after I file my taxes to apply again? In the past few yrs I had a business operating at a loss on my tax returns. I hope to qualify for down payment assistance also. Although I am not sure how that will work-- will they look at just my W-2 income or count the business loss?

I have so many questions but don't know where to start to solve. Any help or advice you offer will be greatly appreciated.

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2 REPLIES 2
Mortgage-Specialist
Established Contributor

Re: Debt To Income and W-2 income for Mortgage Questions

Lenders have been having difficulties lately getting 620 credit score single borrowers approved for CONVENTIONAL loans... It's automated system has been a lot more strict lately especially when there is 1 borrower on the loan instead of 2... FHA has shown its much easier to get approved because FHA will allow manual underwriting. So if the automated system says no (refer/caution) FHA will allow for manual underwriting where Conventional loans they will not. Most lenders are pretty strict with manual underwriting. But there are 1 or 2 lenders out there who will approve many FHA loans via manual underwrite that no other lenders would touch - even after they've been turned down by multiple other lenders. (50% debt ratio allowable on manual underwriting) 

 

FHA shows they require 1% of the student loan balances (loan amount) to be calculated toward debt ratio. In your case of 135K student loan debt, FHA would traditionally use $1,350 as your monthly student loan obligation. This calculation hurts many borrowers debt ratio... There happen to be ways around this that some lenders will allow. The student laon company would normally need to provide a document that states "fully amortized" student loan payment... In which case, many times lenders do not like how it is worded because the student loan company refuses to add key words in their documentation such as "fully amortize."  This causes issues with most lenders.. There happens to be an easy solution to this but I only know of a couple lenders that would accept. They would accept a verbal from the student loan company. Because these student loan companies can say thins verbally that they cannot put in writing.  Therefore, when a representative calls into the student loan company and they state that IF your $135k student loan debt was amortized on a 20 year term at 5% interest, your payment would be $790 per month, the lender would then use $790 per month monthly obligation instead of $1,350. This is HUGE and many times the difference maker. This can also play a roll in a buyer getting pre-approved for a much more expensive house. In your case, by reducing your student loan payment from $1,350 to $790 (a difference of $560 per month) that equates to an extra $100,000 more buying power. 

 

Its been a long day, I hope what I wrote is at least somewhat coherent 

Message 2 of 3
OnMyWay84
Valued Member

Re: Debt To Income and W-2 income for Mortgage Questions

Yes very coherent and clear. Thank you for responding. This was so helpful!
Message 3 of 3
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