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  • Debt-to-Income Ratio

    If you’re looking for a new home, getting approved for a mortgage can be tough enough anyway. How about if you have lots of current debt, though? Perhaps you’ve asked yourself more than once, “Can I qualify for a mortgage with a high debt-to-income ratio?”

    We’ll look today at exactly what that debt-to-income (DTI) ratio is all about so you’re clear on the basics. We’ll then briefly explore 6 ways to improve your chances of financing a new home.

    What is Debt-to-Income Ratio?

    When assessing your ability to repay the financing you’re requesting, it’s not just income and payment history that’s taken into account. Your payment history is responsible for 35% of your FICO score, which means it’s essential you make timely repayments. (1) Coming in a close second, the amount you owe accounts for fully 30% of your overall score which is where your DTI ratio comes into play.

    As if these figures weren’t ominous enough, a survey of loan officers carried out by FICO showed that 59% of those questioned considered a high debt-to-income ratio the biggest single barrier to qualifying for a mortgage with only 10% citing a poor credit score as the leading reason for refusal. 

    A debt-to-income ratio, as the name makes clear, shows the relationship between your pre-tax income and the monthly debts you need to service. As well as the proposed mortgage payment and taxes, lenders will also add in the minimum payments you need to make on credit cards, auto loans, student debt, and any alimony or child support payments. 

    Example: With a gross monthly income of $10,000, housing-related payments of $2000 and credit card payments running to $1000, you’d have a DTI ratio of 30%.

    What Is an Acceptable DTI Ratio?

    In order for a loan officer to overlook a sub-optimal FICO score, you’ll need to have a debt-to-income ratio of less than 36%. If you’re looking at a qualifying mortgage, the official cut-off point is now a 43% DTI ratio. How about if you’re not only shouldering more debt than this, but you also need to borrow more money? You can first address the problem of borrowing more by looking at a jumbo loan. These are loans for more than Freddie Mac and Fannie Mae’s conforming ($453,100 in most counties and $679,650 in some high-cost real estate areas).

    If your recurring monthly is higher than 43%, some lenders are now starting to issue non-qualifying jumbo loans with a higher DTI ratio accepted (3) If you have significant assets, a higher credit score and you’re prepared to put more money down or pay a higher rate, you’ll find that these limits are not necessarily set in stone.

    Can I Qualify For a Mortgage With a High Debt-to-Income Ratio?

    In a word, yes. As with any other element of the picture that is lacking, you might need to dig deeper and explore more options, but you don’t need to give up on the home of your dreams. Here are 6 ways you can improve your DTI ratio and get the finance you need even if your outgoings are higher than desired.

    1) Look For a Less Stringent Mortgage Program

    Not all loan programs come with the same limits concerning debt-to-income ratios. The maximum limit of 36% is set down by Fannie Mae assuming a minimal down payment and less than optimal credit score. This can increase to 45% if you can pay more money down or you have a solid credit history. FHA loans offer more latitude and accept DTI ratios as high as 50% while VA loans can be a very flexible solution as long as you have a decent residual income.

    2) Pay More Money Down

    While increasing your down payment can give you some leeway with your debt-to-income ratio, this is not always practical if you have significant outgoings already. Nevertheless, if you can manage to pay more down, you’ll show the lender increased commitment on your part, and a higher DTI ratio can often be skirted around.

    3) Give It Some Time While Making Payments

    If you have no urgent need to move house, it’s worth simply taking the time to reduce your debt-to-income ratio by making more aggressive repayments if you can afford to. Try to get this figure down to 36% or below before seeking finance, as your options will be widened considerably.

    4) Restructure and Consolidate Some Debt

    Restructuring your debt can help you roll multiple monthly payments into one manageable payment at a more favorable rate of interest. Balance transfers can be invaluable in this regard. If you have student loans, consider extending the repayment period. You could think about doing the same with an auto loans.

    Make sure you keep all documentation regarding any debt restructuring. New accounts often take a month or two to crop up on your credit report so be prepared and give the loan officer what he needs to maximize your chances of qualifying for a mortgage with a high debt-to-income ratio.

    5) Seek Government Assistance

    You might not be aware but there are government programs in place to help borrowers with higher debt-to-income ratios worth investigating. FHA loans allow qualified borrowers with DTI ratios as high as 55% to get the home they want. (4) With a VA loan, recurring debt of 41% is acceptable.

    The HARP (Home Affordable Refinance Program) is ideal if you have very little or negative equity, but you’ve got a payment history in good shape and you’re prepared to refinance.

    6) Consider Cash-Out Refinancing

    Last but by no means least, think about cash-out refinancing. Here, the extra cash is used to pay down those debts which will automatically reduce your debt-to-income ratio. Checks are sent directly to lenders and you might need to close the accounts as well, so this is not an option for everyone.

    As you can see, it’s quite possible to qualify for a mortgage even if you have a high debt-to-income ratio. If you don’t manage to get the finance you need, take a look at the above pointers and see which would work best for your circumstances. Contact Everest Home Mortgage if you want clarification or help with any element of financing a mortgage with a high DTI ratio.