HUD DTI Ratio Guidelines (debt-to-income) is one of, if not the most important factors when determining if you qualify for an FHA loan. What is the debt-to-income ratio you might be asking?
Well the DTI ratio is the sum of all monthly minimum monthly payments which includes principal, interest, taxes, and insurance (PITI) of the new property divided by the borrower’s monthly gross income. Depending on the mortgage program you are looking to get qualified for, the DTI ratios might differ. HUD DTI Ratio Guidelines borrowers are capped at 46.9% DTI front-end and 56.9% DTI back-end to get an approve/eligible per automated underwriting system.
In general, lenders view lower credit score borrowers as having a higher risk. Chances are to get an AUS approval with the max debt to income ratio allowed by HUD, you will normally need a 620+ FICO score. However, if your FICO is under 620, the AUS algorithms significantly reduce the DTI Ratio to below the maximum DTI cap unless the borrower has strong compensating factors.
Having a poor credit score definitely has some ramifications in this sense. Also, HUD DTI Ratio Guidelines have borrowers with under 620 FICO scores as higher risk and this will lead to them getting higher interest rates for the risk involved to write the loan. In addition to higher interest rates, verification of rent and timely payments will need to be shown.
HUD DTI Ratio Guidelines allow for manual underwriting on FHA Loan Applications that cannot get approval from Desktop Underwriter (DU) or borrowers that have a FICO score under 620. Manual underwriting is when a Mortgage Underwriter manually underwrites an FHA Loan Application instead of going off of the Fannie Mae Automated Underwriting System. Manual Underwrites are a lot more frequent than you might think.
One of the scenarios where you will find a manual underwrite is on all FHA Loans after a Chapter 13 Bankruptcy discharge that is within 2 years of the discharge date. The manual underwrite will be looking for verification of rent to ensure the borrower has 12 months of timely payments. The end-game of the manual underwrite is for the FHA Underwriter to have confidence in your credit history and your current state and be confident you will be able to afford the loan.
The HUD DTI Ratio Guidelines, in terms of putting a requirement on a specific DTI ratio for a manual underwrite, don’t specify an exact DTI ratio they are looking for. In these cases, it will be up to the FHA mortgage underwriter to determine the creditworthiness of the borrower and if they can afford the loan. In most cases, underwriters will be looking for a DTI ratio of around 43-45% but it is not uncommon for underwriters to approve all the way up to 53-55%. If the borrower has strong compensating factors such as a steady full-time job and even a full-time 2nd job this will go a long way in showing creditworthiness.
However, if the borrower is going to use the income from the 2nd job they must be there for at least 2 years or the income cannot be counted in the ratio. If the underwriter has confidence in the 2nd job they can allow for a higher DTI ratio because they are confident the 2nd job will continue.
If you are looking for a loan officer specializing in manual underwriting, you have found the right person, so please contact us Loan Consultants at 844-275-2007.