Mortgage Application Tips #3 - Debt to Income Ratio

The debt to income ratio is a formula lenders use to determine how much of your income is available for a monthly mortgage payment after you meet your other monthly debt payments. This is an important aspect of the mortgage application process. Without a good number, you won't be able to qualify for your new home.

About your qualifying ratio:

Typically, underwriting for conventional mortgages requires a qualifying ratio of 28/36. FHA loans are a little less strict, requiring a 29/41 ratio.

The first number in a qualifying ratio is the maximum percentage of gross monthly income that can be applied to housing (this includes mortgage principal and interest, private mortgage insurance, hazard insurance, property tax, and homeowners' association dues).

The second number in the ratio is the maximum percentage of your gross monthly income that should be applied to housing costs and recurring debt together. For purposes of this ratio, debt includes payments on credit cards, auto/boat loans, child support, and the like.

For example: 


28/36 (Conventional):
Gross monthly income of $8,000 x .28 = $2,240 can be applied to housing
Gross monthly income of $8,000 x .36 = $2,280 can be applied to recurring debt plus housing expenses

With a 29/41 (FHA) qualifying ratio :
Gross monthly income of $8,000 x .29 = $2,320 can be applied to housing
Gross monthly income of $8,000 x .41 = $3,280 can be applied to recurring debt plus housing expenses

Remember these are only guidelines. We will be happy to pre-qualify you to help you determine how much you can afford. Give us a call at 877-828-8851.

Be sure to view last week's article about proving your employment and income for a home loan.

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Changes and New Mortgage Regulations 2013

Over the next six months, many decisions will be made regarding the future of the real estate finance industry. These rules will determine what kind of housing market we leave for future generations.  The Dodd-Frank rules are upon us and will be dramatically transforming the industry. The first of these new rules that were mandated under Dodd-Frank and the Consumer Financial Protection Bureau (CFPB) show that the housing market appears to be in a broad recovery. These new regulations will shape how mortgage lending operates.

Recently, the Qualified Mortgage (QM) rule was released by CFPB and it will bring about significant changes to homeownership. Since 90% of mortgages are currently going through GSE and FHA underwriting, the new rule will most likely not have much impact on the credit rules. However, lenders will have more confidence and certainty about lending right up to the edges of the intended QM credit box. This broad credit box should help to serve a larger number of qualified borrowers by allowing for 43% DTI.

Many regulations are being released today and there will continue to be more rules and regulations released this year. Many policies will address a range of issues that effect the housing market. These changes and regulations are necessary, however they can go one of two ways. If these rules are done right, we'll have a coordinated and balanced system that doesn't tighten credit and ensures that more qualified borrowers have access to affordable loans.  If the rules are done wrong, though, they'd make lending too restrictive. Credit rules would be even tighter which would have a huge impact on first-time homebuyers and both low-income and middle-income families. This market would be cutting out the consumer.

Clearly, a balanced housing policy is crucial. We cannot have a system that over-corrects and prevents qualified borrowers from purchasing a home. Distinct rules, policies, and regulations need to be set in place with forethought to the downstream effects of overlapping policies also in mind. Right now, the FHFA, Fannie Mae, and Freddie Mac are all willing to work together transparently so that these policies can be set in place fairly.

If you have questions or concerns about how this effects you and your mortgage situation, do not hesitate to call Quest Loans. We have experienced professionals that can help to answer all of your questions. 888-883-5252

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