Debt To Income Ratios | Yale Roth M.A., M.Ed

Posts Tagged ‘debt to income ratios’

What Your Debt To Income Ratio Needs To Be To Qualify For A Mortgage Loan

February 23rd, 2012 |

Author: yroth

debt to income ratios for mortgage loan qualifying

What Do Your Debt To Income Ratios Have To Be To Qualify For A Mortgage Loan?

A lot of homeowners and first time home buyers wonder whether they’ll qualify for a mortgage loan.

Whether refinancing an existing mortgage loan or applying for a mortgage loan for a new home purchase requires more than just a decent credit score.

In addition credit scores above 620, homeowners and first time home buyers know about home loan debt to income ratios.

Debt to income ratios are what mortgage loan underwriters use as a underwriting criterion when they make a decision on a mortgage loan application.

First, how are home loan debt to income ratios calculated?

Debt to income ratios are calculated by taking the homeowner’s monthly installment debt – like house payment with monthly property taxes and dwelling insurance escrow installment, car payments, minimums that have to be paid on outstanding credit card debt, alimony or child support, student loan payments, RV or boat loans, etc. – and dividing that figure into the monthly household income.

So let’s say that the monthly installment debt is $2000 and let’s also say that the gross monthly household income is $6000.

The monthly installment debt is divided into the gross monthly income to get what’s called a Total Obligations Ratio.

In this example 2000/6000 = 33%.

What is an acceptable home loan debt to income ratio for mortgage loan underwriting?

For the Total Obligations Ratio, the number cannot exceed 50%.

So that means that the monthly installment debt cannot be more than 50% of the gross monthly income.

If it is above 50%, the Total Obligations Ratio is too high and the mortgage loan will be declined.

In addition to the Total Obligations Ratio, mortgage loan underwriters also look at – what’s called – a Housing Expense Ratio.

A Housing Expense Ratio is taking the new home loan monthly payment, including monthly property tax and dwelling insurance installment, and divide it into the gross monthly income.

So if the mortgage loan principal, interest, taxes and insurance PITI payment is above 50%, the mortgage loan will be declined.

Preferably, mortgage loan underwriters want to see the Housing Expense Ratio around 38% of the gross monthly income or lower.

If someone has a Housing Expense Ratio above 38%, that would mean that a greater portion of their monthly installment debt is going towards their home loan payment.

This puts the homeowner into a precarious position as they have little room to take on new unexpected (or expected) debt.

In conclusion, your total debt to income ratio cannot exceed 50%, with your housing expense ratio capped at 38% to 42%.

Mortgage Refinance Questions – “Why Did My Mortgage Application Get Declined?”

December 1st, 2011 |

Author: yroth

Out of all the mortgage questions I get, this one may be asked if someone’s mortgage application is declined:

“Why did my mortgage application get declined when I’m lowering my monthly mortgage payment, lowering the total monthly debt obligation I have, I have great credit and have never been late on my mortgage, and I have money in the bank where I can pay off the mortgage if I want and I have 50% equity in my home? It just doesn’t make sense.”

From a common sense standpoint, the borrower is exactly right. If you were the mortgage company and your borrower had great credit, was never late on their mortgage, had a lot of cash and was LOWERING their total monthly debt obligation by lowering their monthly mortgage payment, why not make the loan.

Here’s the answer.

After the “mortgage meltdown that took place beginning in 2007, Fannie Mae and Freddie Mac underwriting guidelines changed.

That is to say that it didn’t matter to those institutions that a borrower had money in the bank, great credit and had a history of making timely mortgage payments and also had a lot of equity in their home, if the debt to income ratios were too high – say over 50%, they would not buy the loan.

In a world of securitized mortgages where the majority of mortgages with loan amounts less than $417,000 are bought by Fannie Mae, if the loan isn’t saleable, it isn’t one that can get approved.

Prior to the mortgage meltdown, there were mortgages that were called “no ratio” mortgages. These loan types calculated ratios but didn’t consider them during the underwriting of a mortgage application.

So a borrower could have great credit, a substantial amount of savings and a lot of home equity and they could still get approved for a mortgage. The mortgage rate or the cost to get the “no ratio” mortgage may be slightly higher; however, it was available.

Nowadays, most mortgages are declined due to excessive ratios and it doesn’t matter what compensating factors there may be.

The “drop dead” 50% debt to income ratio guideline that declines a file irrespective of borrower savings, credit and home equity is somewhat counter intuitive, but that’s the rule – at least for now.

In conclusion, when I’m asked “Why did my mortgage application get declined when my credit is great, I have lots of home equity and more cash saved than I know what to do with?” I respond saying it’s because your debt to income ratios are too high.

Mortgage Decline? Can You Do Anything?

November 21st, 2011 |

Author: yroth

Giving someone the bad news that their mortgage application has been declined is always difficult.

Invariably, I get the mortgage question, “Can anything be done to reverse the mortgage decline?”

This is what you need to know.

First off, the majority of mortgages less than $417,000 are sold to Fannie Mae or Freddie Mac. They’re called agnecy loans. Both of those institutions have guidelines for purchasing mortgages, so if your mortgage application is outside their guidelines, then you have to correct what’s wrong so your mortgage is in compliance with their guidelines.

In addition, mortgage lenders place whats called “overlays” on top of the Fannie Mae and Freddie Mac guidelines. So theorectically, your loan can be eligible with Fannie or Freddie; however, will be declined by your lender because it is outside their added overlay (or guideline.)

When you’re told that your mortgage application has been declined, you want to ask why.

Is it your credit scores? Credit scores below 620 may prevent the loan from getting approved. You want to know your scores. There are 3 of them and you want to focus on the middle credit score.

If your scores are below 620, you want to find out how you can improve them so you can qualify. (You can check out Credit Repair Magic for help. Yes, in full disclosure, I do receive a small referral fee if you use them to fix your credit.)

Is it because you appraisal came in low and there is no equity in your home?

If this is the case, you have a couple of options. The first is to rebut the appraised value. Please note that you have to provide facts – not your opinion – on why your appraised home value is low. Did the appraiser get the square footage wrong? Did they get the numbers of bed rooms or bathrooms wrong?

If you’re unable to rebut the appraisal, then either you can pay your mortgage balance down so there is equity in home. You want to think hard about doing this because you’re taking good cash and putting it down against a non-performing assert (i.e. your home.)

The other option you have is to go with another lender and have another appraisal done. Think about this one as well as you’ll need to payfor another new appraisal.

If your mortgage wasn’t declined becuase of poor credit or low equity, was it becuase your debt to income ratios are too low?

You want to ask how the DTI ratios were calculated. What income did the underwiter use? What debt did the underwriter use?

Is the monthly installment debt (including monthly property taxes and insurance), accurate?

If so, you have two options to correct this.

The first is you can get a co-signer to help you qualify. That means then you’ll need to go into an FHA mortgage, as conventional mortgages don’t allow for non-owner occupied co-borrowers (i.e. co-signers).

If you don’t have a co-signer or don’t want to go into an FHA mortgage, then you can look at what debt you can eliminate to bring the debt to income ratios lower.

Remember, you want your debt to income ratios below 45% – 50%.

If you’re considering paying off debt to qualify, ask yourself where the cash is coming from to reduce the debt. Im not sure I’d recommend depleting your savings to reduce or payoff debt.

So to answer the mortgage question, “Can anything be done to reverse a mortgage decline,” you first want to find out why the mortgage application was declined and then talk to your loan officer about the options available to reverse the decline.

Mortgage Refinance Questions – Does It Make Sense To Pay Down Credit Card Debt So You Can Qualify For A Mortgage Refinance?

November 7th, 2011 |

Author: yroth

This is a really good mortgage refinance question I got this weekend: “Does it make sense to pay down or pay off credit card debt to qualify for a home mortgage refinance?”

Here’s the mortgage refinance scenario: My client has an existing mortgage with a rate of 5% 30 year fixed mortgage and has paid into it for 9 years, so he has 21 years remaining. He plans on keeping the home as his kids are still young.

The problem is that he’s self employed and reported less income over the last 2 years – like most people.

He went to his current lender Bank America so see if he could refinance into a lower mortgage rate.

They loan officer there told him based on his reported income, his debt to income ratios are too high and that he wouldn’t qualify for a new mortgage refinance.

However, she suggested that if he paid off about $20,000 in credit card debt, he could qualify.

He asked me is this made sense.

I asked him how much he had in savings. He told me less than $100,000, including retirement money.

I advised him not to deplete his savings to pay off credit card debt.

Taking 20k out was a judgment call on his side as the remaining 80k is more than 6 months of his monthly income.

However, I suggested if he were considering paying the credit card debt (which is low fixed rate) off, he ought to alternatively look at an mortgage amortization calculator to see what would happen to his mortgage if he applied the 20k to that.

(Some people would advise just the opposite: that he should pay off the credit card debt first as the mortgage interest is tax deductible, etc.)

In this case, however, the credit card interest rate is low and fixed and the debt is unsecured as opposed to the mortgage debt which is secured against his home.

Normally, I don’t recommend applying large amounts of money to pay down on a home mortgage, especially if the home value currently isn’t increasing. That’s like putting good cash against a non-performing asset.

However, since he’s committed to the home for the long haul, the credit card interest rates are fixed and low, and he’s not depleting his savings, he might consider applying the 20k against his current mortgage balance.

What’s his mortgage goal?

His goal is to pay off his mortgage asap. Applying the 20k towards mortgage principal reduction could potentially be a positive first step towards accomplishing that goal.

If he can take many years off the remaining 21 years, and continues to prepay against the mortgage in monthly small amounts, he’ll reduce his net effective mortgage rate and save big money on the back end by paying the mortgage off sooner.

Consider taking the $1500 mortgage payment and saving it! Moreover, he’s saving money in closing costs and saving time in gathering paperwork to complete the mortgage refinance.

I didn’t look at the amortization calculator, but it’s definitely worth considering taking the 20k and prepaying against the current mortgage as opposed to paying of the credit card debt so he can qualify for a mortgage refinance.

First Time Home Buyer? 3 Requirements To Get A Mortgage.

October 18th, 2011 |

Author: yroth

This post is addressed to first time home buyers but applies to anyone who’s buying a new home and answers the mortgage question, “What are the 3 requirements to get a mortgage and buy a new home”?

For a first time home buyer, you want to pay special attention.

The first thing you need is decent credit. So it you’re a first time home buyer start to think about your credit. Make sure you’re paying your bills and rent on time.

In order for you to qualify for a mortgage, especailly as a first time home buyer, you need a middle credit score of at least 640. Some banks will accept scores as low as 620. I’m not aware of any mortgage lenders that accept scores below 620.

The second thing you need to get a mortgage is income.

You need to have some employment stability – preferably 2 years at the same employer – and not have monthly installment debt that exceeds 45% to 50% of your gross monthly income.

This includes car payments, the proposed mortgage payment with taxes and insurance, any student loans, and minimums you pay on outstanding credit card balances.

This is called debt to income ratios. For mortgage underwriting, as I mentioned, the DTI can’t exceed 45% to 50% of your gross monthly income.

If you’re a first time home buyer and your DTI is coming in too high, you can get a co-signer (i.e. family member) to go on the mortgage loan with you. This would be under a FHA mortgage program. Also, this person should have strong credit scores as well as good verified income and little debt.

The third thing you need to qualify as a first time home buyer is money for the down payment. A minimum of 3.5% of the purchase price is required (and this would be under a FHA mortgage), unless you’re a veteran and you’ll be eligible for a VA mortgage.

The more money you have to put down the better.

Also keep in mind that there will be closing costs that you’ll have to pay, unless you negotiate a seller credit back to you to pay for some or all of the costs.

The main thing is that you need to have some money saved up.

So, if you’re a first time home buyer and want to buy a new home, you want to have good credit, low debt to income ratios, and money in the bank!

Mortgage Affordability – What Mortgage Loan Can I Afford?

October 12th, 2011 |

Author: yroth

What Mortgage Can I Afford?

This is a mortgage affordability question I get a lot. “What mortgage can I afford?”

There are 2 ways you should approach this mortgage question.

The first is how much mortgage can you afford from your own budgetary standpoint?

Only you know what you can afford to pay in a mortgage payment without becoming “house poor.”

Once you’ve calculated how much of a mortgage payment you can afford, you want to go to a mortgage calculator and see what the mortgage payment would be based on your requested mortgage amount.

Remember to estimate the annual real estate property taxes and hazard insurance as you’ll have to include that with your principal and interest mortgage payment. The PITI (principal, interest taxes and insurance) will tell you your full mortgage payment and show you what mortgage you can afford. A general rule of thumb is that the real estate property taxes will be around 1% of the home purchase price and hazard insurance will be about .5% of the home purchase price.

The other consideration you want to keep in mind when asking what mortgage can I afford is what mortgage you’ll qualify for.

From an underwriting standpoint, you don’t want your monthly installment debt including your mortgage payment to exceed 45% to 50% of your gross monthly income.

You also need credit scores – preferably over 640.

So to sum up, you want to first figure out your mortgage affordability – that is – how much you can afford to pay in a mortgage payment. Then go to a mortgage or biweekly mortgage calculator and enter different loan amounts.

The mortgage payment will be calculated based on the mortgage amount you enter plus the mortgage interest rate you enter.

You can also adjust the mortgage term, say from a 30 year fixed to a 15 year fixed. When you do that you’ll see the mortgage payment increase; however, the mortgage payment may still be within your mortgage affordability monthly budget.

Lastly, you want to remember from a mortgage affordability and underwriting standpoint that your monthly mortgage payment together with your other monthly installment debt can’t exceed 45% to 50% of your gross monthly income.

These are called debt to income ratios and the lower the ratios the better.

Mortgage Affordability – How Much Mortgage Can I Afford?

September 22nd, 2011 |

Author: yroth

This is a one of the top mortgage questions I get – “How Much Mortgage Can I Afford.” It’s a completely legitimate mortgage question.

There are two ways to approach the question: the first way is from your personal budgetary standpoint – how much of a mortgage payment can you afford to make per month. You know your budget. You know whether a $2500 mortgage payment is too much for you.

So the first thing you want to think about is how much can you personally afford or allocate for a monthly mortgage payment without stressing yourself out – or being “house poor.”

Once you’ve determined your personal mortgage affordability, you have to see how much the mortgage company will qualify or approve you for.

This is what’s called a debt to income ratio. It’s one of the underwriting criteria underwriters use to get a mortgage approval.

The way it works is as follows:

Take your monthly installment debt – (i.e. your new proposed mortgage payment with taxes and insurance, car payment, minimums you’re paying towards credit cards, student loan payments, alimony or child support, boat loan payments, rv payments – any other installment debt you may have) and divide it into your gross monthly income.

This is what’s called – in mortgage talk – your total obligations ratio.

Generally speaking, you don’t want your monthly installment debt including the new mortgage payment to exceed 45% – 50% of your gross monthly income. If it’s over 50%, the DTI will be too high and you’ll have a hard time qualifying for the mortgage.

The other factor that’s undewriting looks at from a debt to income ratio standpoint is what’s called the housing expense ratio.

To calculate that, take your mortgage payment – which will be principal, interest, taxes and insurance (PITI), and divide it into your gross monthly income.

You don’t want it exceeding 40% – 50%. This would suggest that your monthly income is devoted primarily to your mortgage payment. Underwriting doesn’t like this.

So, in terms of mortgage affordability, first consider what you can personally afford to spend on a mortgage payment, then calculate your debt to income ratios to make sure they don’t exceed underwriting guidelines so you can get approved for the mortgage.

If you want an idea about a proposed mortgage payment, go to my mortgage calculator and do a personalized mortgage search.

It’ll show not only the mortgage rates, but also the mortgage principal and interest payments for all the loan types (i.e. 30 year fixed mortgage, 20 year fixed, 15 year fixed, 10 year fixed mortgage, etc.).

It won’t show you the tax and insurance part so you’ll have to add that to the principal and interest payment to see the total PITI mortgage payment.

I hope this answers your mortgage question about mortgage affordability.

Mortgage Money FAQ – How Do You Know Whether You’ll Qualify For A Mortgage?

September 12th, 2011 |

Author: yroth

I get a lot of questions about getting approved for a mortgage. “Will I get approved’ or ” I don’t want to apply if I’m not going to qualify,” etc.

With the overwhelming change in the mortgage industry, getting approved or pre-qualified is a legitimate question. It’s definitely harder to get approved or pre qualified now in comparison to 4 years ago. (There was an old joke in the mortgage industry that said if you had a pulse, you’d qualify.)

What’s needed to qualify?

There are 4 main underwriting criteria that need to be met to get approved for a mortgage. This applies to both purchases and refinance transactions.

The first thing you need is good credit. If your scores are below 620, you’re going to have a hard time qualifying for the mortgage – bottom line.

The higher your credit scores, the better likelihood you’ll get approved and the lower your mortgage rate will be.

The second thing you need is to keep your debt to income ratios below 45%-50% of your gross household monthly income.

So that means that if your monthly installment debt (i.e. car payment, minimums you’re paying on credit cards, student loans, boat loans, other real estate or mortgage payments you’re making) aren’t MORE than 45% – 50% of the gross monthly household income, you are eligible for the mortgage.

For example, you earn $5000/month in gross income and if your monthly installment debt INCLUDING the new home mortgage WITH taxes and insurance is less than $2500/month you’re ok.

If your debt to income ratios exceed 50%, you’re going to have a hard time qualifying.

The third criteria needed to qualify is the loan to value ratio or the amount of equity you have in the home.

To qualify for the best terms and lowest rates, you’ll need at least 3% more in equity in the home – and this would be under a FHA mortgage program. Home equity is the difference between what you owe and the home’s value (which is determined by a home appraiser.)

This applies to primary residences only and also varies according to the mortgage amount.

So, if your home is worth $100,000 and you want to borrower $105,000, you won’t be eligible for a conventional mortgage.

However, as long as you have 3% – 5% in home equity, you would be eligible for a conventional or FHA mortgage. Also, if you’re a veteran, you can borrower up to 100% of the home’s value.

The fourth requirement to qualify for the mortgage (and this will vary depending on whether you’re buying a new home or refinancing your existing mortgage) are cash reserves.

If you’re buying a new home or refinancing your existing mortgage, you’ll need provide copies of your last 2 months bank statements or quarterly brokerage statement. Mortgage underwriting is looking to source your down payment (if a purchase) or looking for reserves (i.e. cash savings) for the refinance.

If the transaction is a mortgage refinance, underwriting will want to see at least 2 months of PITI principal, interest, taxes and insurance saved up.

So if you’re mortgage payment is $1000/month, you’ll need to show at least $2000 in savings. The more the better as this would “strengthen” the file.

If you’re taking cash out of your home, then reserves may not be needed.

To recap, to qualify for a mortgage, you’ll need your credit scores to be over 620, the debt to income ratios below 45% – 50% of your gross household monthly income, at least 3% equity in your home and cash savings to verify as reserves.

If all of these requirements are met, you should have no trouble qualifying for the mortgage!

Yale Roth M.A., M.Ed

Posts Tagged ‘debt to income ratios’

What Your Debt To Income Ratio Needs To Be To Qualify For A Mortgage Loan

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Mortgage Decline? Can You Do Anything?

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