Thursday, February 4, 2010

Current Debt-to-Income Ratios (DTI)

We get a lot of questions about debt-to-income ratios these days. Here are the underwriting guidelines for the various types of loans:

Conventional (non-government) loans:

• If the loan is underwritten manually (by a person), the debt-to-income ratio (DTI) is 36%. If the borrower has strong compensation factors, the DTI can be as high as 45%. Compensating factors include such things as very high credit scores, large down payment, large amount of reserves (money in the bank), etc.
• If the loan is underwritten by the underwriting software that is available to some lenders, the DTI ratio is 45%, and it can go as high as 50% with strong compensating factors.
• IMPORTANT NOTE: Individual lenders are allowed to impose their own, more restrictive DTI guidelines on top of Fannie Mae’s, so make sure you are using a lender who does not do that.
• SUPER IMPORTANT NOTE: Private mortgage insurance companies impose their own, more restrictive DTI guidelines on top of the lender’s guidelines and Fannie Mae’s guidelines. At the moment, 41% is the maximum allowable DTI at most private mortgage insurance companies. Their guidelines change constantly, so this needs to be checked every time a loan is originated.
• In the old days, there were two DTI ratios for conventional loans – one for the housing expense ratio and one for the total expense ratio. Fannie Mae no longer uses two DTI ratios.

FHA loans:

• Unlike Fannie Mae, FHA uses two DTI ratios. The front-end DTI ratio (housing expenses) is 31% and the back-end DTI ratio (total expenses) is 43%. This only applies if the loan is manually underwritten.
• If the loan is underwritten by the software FHA provides to some lenders, then the ratios are not specified. It depends on credit scores, down payment, reserves, etc. We commonly get approvals from the software for ratios of 40-46% for the housing ratio and 50-55% for the total expense ratio.
• Lenders are allowed to add their own, more restrictive guidelines on top of FHA’s, so it is wise to use a lender who does not.
• Mortgage insurance is not an issue with FHA ratios because FHA insures the loan. There are no additional restrictions for mortgage insurance with FHA loans.
• If a borrower is using alternative credit (they have no credit scores and are using other trade lines to establish credit – rent, utilities, etc.), then they are restricted to the manual underwriting guidelines – 31% front-end and 43% back-end.

VA loans:

• VA only uses one, total expense ratio as well. It is 41% if the loan is underwritten manually.
• If the underwriting software that VA supplies to some lenders is used, then the DTI ratio is not specified. We typically see loans approved with DTI ratios in the 45% - 55% range. It all depends on credit scores, reserves, etc.
• Lenders are allowed to add their own, more restrictive guidelines on top of VA’s, so check with your lender before assuming VA’s guidelines can be used.
• There is no mortgage insurance with VA loans, so there are no additional restrictions related to mortgage insurance.

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