Given the depression in the economy, many borrowers are uncertain as to whether they can meet the stringent underwriting guidelines and qualify for a particular loan program. Debt-to-income (DTI) ratio is one of the key factors that determine a borrower’s eligibility for a mortgage. In a forum discussion at MortgageFit one of the posters asked the community about her chances of qualifying for a home loan with a high DTI ratio in this market.
The poster’s husband is an army veteran, looking to buy a home for the first time and requires a loan worth $150,000. The poster and her husband have credit scores of 730 and 760, with a monthly income of $7,700. They have cash savings of $9k. But they are concerned about their DTI ratio, which is around 37-39%, if they add monthly payment of $1100 for the mortgage and taxes. Their monthly payment towards debt obligations is $1730, including child support, student loans, etc. She asked the following questions:
1. Whether they qualify for a mortgage with a DTI ratio of 37-39%
2. If they should first refinance to pay off a personal loan of $25k before applying for a home loan.
It's true that things have changed a lot in the mortgage industry since the sub-prime mortgage crisis. Qualifying for a new loan is not as easy as it was 4-5 years back. But the poster and her husband have impressive credit scores, despite the fact that most of the borrowers are facing problems with their credit due to pay-cuts, lay offs and other financial reasons. For FHA or VA loans, a minimum score of around 620 is required. For conventional loans, the requirement is something around 720. So, they qualify not only for FHA and VA loans, but also for conventional loans, in terms of credit scores.
DTI requirements for various mortgages
The poster’s DTI ratio could be slightly on the border line for conventional loans. But it does not disqualify her and the husband for a home loan. A typical conventional loan requires a DTI ratio of 28/36. This means the front end DTI ratio (percentage of the payment towards PITI as compared to the gross monthly income) should not exceed 28%. Likewise, your back end mortgage debt ratio (percentage of payment towards all debt obligations including PITI as compared to the gross monthly income) should be somewhere around 36%. But in most cases, the lenders are flexible enough to allow for a slightly higher DTI ratio. Lenders even allow borrowers to have DTI ratio as high as 45-50%. However, the interest rate on the loan will be high and the borrower will be asked to put down a large payment upfront.
Why VA loan is best suited for the poster
The allowable DTI ratio for FHA mortgages is 31/43. In case the poster and her husband want to go for an FHA loan, their debt-to-income ratios will not be an issue. But they need to pay a minimum of 3.5% down payment for the loan. They will also have to pay mortgage insurance premium of 1.75%, in case the down payment amount is less than 20%. Since her husband is an army veteran, in my opinion, a VA loan is best-suited for poster’s situation. VA requires a back-end ratio of 41%. Thus, the poster’s DTI ratio of 37-39% will not be a problem.
The best part about VA loans is that the borrower is not required to pay any mortgage insurance and he can obtain a loan with a zero down payment. However, the laws do require a veteran to pay a funding fee. For first time borrowers, the funding fee is 2.15% of the loan amount for 0% down payment. The fees are reduced to 1.50% and 1.25% respectively, if down payments of 5% or more and 10% or more are made. Given the poster has a cash savings of $9000, she can put down something around 6% and reduce the amount of funding fee. As far as refinancing the current mortgage to pay off the personal loan of $25k is concerned, I’d say it is not required. They can simply keep paying the personal loan as per the repayment plan. Their DTI ratio is well within the standard value required by VA and they should not have any problem in qualifying for the loan.
To refer to the discussions on this topic, you can follow the link given below:
http://www.mortgagefit.com/homeloan/dti-ratio-credit.html .