Debt to Income Ratio Details

[Anonymous]

(I thought i read somewhere with a FHA loan the mortgage payment itself with pmi and everything total with it etc.. must be 29%  or less of total income, and total DTI must be like 41%~ or something like that or less)Lets say I am paying 900 a month in rent, then i apply for a fha loan,  The mortgage is only going to be 500 a month.  Are the banks or the underwriter's going to consider my current rent payment of 900 at all and/or is that used in the DTI ratio?  Or would only the mortgage of 500 be used in the equation or a mix of both? idk lol...so i guess the question is are the total DTI ratio's figured from your current payment such as lease or rent, or only from the upcoming loan on the new house's mortgage payment?.  Is rent even ever factored in? if it is factored from your current debt in the equation?  I also read somewhere on here that it should just be obligations  you can't pay off in a short time, such as other mortgages, installment loans, auto loans, student loans etc...  and that utilities, internet, cell phone, etc would not be factored in because you pay monthly for the service.   So is a lease or rent considered debt in the ratio?  I'd imagine if you had a first mortgage that would be considered debt, but yeah just wondering with a lease or rent for a first time home buyer

      Any insights or clarification on this would be awesome!    Thanks      -james-

[ShanetheMortgageMan]

It's 31/43% FYI, and that is just for manual underwriting.  For someone who has good compensating factors (high credit scores, good reserves in the bank, and/or more than just 3.5% down payment) certainly can qualify for higher debt ratios with the aid of automated underwriting (FHA TOTAL).

When you are buying your new primary residence the debt ratio only includes what your new housing payment will be, doesn't include what you are currently paying in rent.  It also doesn't include utilities, insurance, internet, etc. personal items like that.  Only actual debt (car loans/leases, student loans, credit cards, income tax repayment plan, etc.).

[Anonymous]

Awesome thanks for the response!   One more question how do they determine your 'income' for that ratio?  Do you know when I bring in my income tax reports and pay stubs,  will they be looking at tax statements from last year?   just average the last 2 years together, or go off my projected income for the current year and just use last years taxes for proof of long standing consistent income?   

      Thanks again for your help!    -James-

[ShanetheMortgageMan]

You are welcome.  

It depends on how you are paid.  If you are paid salary then they'll use your current salary.  If you are paid hourly then if you've always worked 40 hours (or however many) a week then they'll take (your current hourly rate x 40 hours a week x 52 weeks a year) divided by 12 months to get your base income.  If it's been inconsistent hours then they'll use a 24 month average of your base pay.  OT/bonus/commission income will be averaged (but if it's declining then only the most recent sample would be used, if it's increasing then it's averaged, but if it's really increasing then it may be discounted and only past years used... see... it depends) and it must also be likely to continue per your HR/payroll department verifiers.  Tax returns are analyzed as well, in case any unreimbursed employee expenses are claimed then that will reduce the qualifying income.

[Anonymous]

          Great info! wow i'm impressed, that is exactly the stuff I was looking for! 

          I had one or 2 more questions I am having trouble finding good answers like you are providing. 

          Are the banks going to be looking at whether I have been with a single employer for a allotted amount of time? like 12month or 24month limitations?  I read somewhere that you don't want to switch jobs or change career paths in the mortgage approval process, but (before the approval process even begins and lets assume I am not switching jobs from now on for the rest of my life) with a fha loan, is my current employers(hourly) work history longevity going to be a factor? If so what are the minimum requirements fha approval will be looking for?

         Also,  I have another approval question I haven't had luck getting answered.  When a while ago I was applying for a fha loan, i was reading that you must have 2 active traditional tradelines, with min credit scores etc...  Since I had a 'thin' file and the loan officer said i didn't have a fico,  he stated he could base some pre-loan qualifications on 'non-traditional' credit lines like rent, utilities, etc... (needed 3 non-traditional CL for at least 12 months with no late payments is what he said) 

          If  I apply again in the future and I have 2 active tradelines (traditional) in good standing, with little to no balance, but with consistant on time payment history.  How long are the minimum limitations for the fha loan approval process in terms of time that those accounts have to have been opened and maintained in good standing (i.e. months 12,24 etc..)?

         With a FHA loan, If I have said 2 'traditional'  credit lines(for the needed amount of time, if there are such requirements), will I still need to meet those 3 "non-traditional" credit qualifications. Or is it just an if, then set-up?

    Thanks again! and if you guys can help me out with these I will be extremely grateful!

[llecs]

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@Anonymous wrote:

       ......2 active traditional tradelines, with min credit scores etc... 

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Per FICO scoring, in order for a score to be generated, you have to have at least one reporting TL open, and not under dispute, and that TL has to be open for 6 months. Once it hits 6 months old, then you'll see a FICO score. So by now, you might have three scores if those two TLs are reporting to all three and at least one of them is 6mo old..

[ShanetheMortgageMan]

FHA requires a 2-year employment history.  Switching employers often does not look good to an underwriter as it can be a sign you are not able to hold down a steady job, or that even if you do land a good job, you may not be content there for long.  Switching employers for a higher rate of pay, career advancement, etc. are all reasonable reasons to switch employers that normally underwriters do not take issue with.

FHA's minimum trade line requirements are 3 trade lines of 12 months each, they can be traditional or non-traditional, or a combination of both.

http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_36032.doc has the details.  However each lender may have their own overlay guidelines that actually require 3 traditional trade lines of 12 months each, etc... so again, ask ahead of time on the minimum trade line requirements before having your credit checked by the lender.

[Anonymous]

Thanks great info!

[ShanetheMortgageMan]

You are welcome.

[Poet34]

Hi Shane,

You wrote: "FHA's minimum trade line requirements are 3 trade lines of 12 months each, they can be traditional or non-traditional, or a combination of both."

Is that 3 ACTIVE trade lines or you must have a history of 3 successful tradelines of 12 months each?

If I only have 2 are you saying I absolutely will not be approved?

Thanks for your contributions.