Debt To Income Ratio Key To Tucson Home Mortgage
A Red Flag For Mortgage Lenders Is The Debt To Income Ratio
Debt to income ratios are the biggest hurdle in obtaining a mortgage in today’s Tucson Real Estate market.
While many factors are considered during the mortgage approval process, some are more important that others. A recent study by credit-score giant Fair Isaac Company offers insight on the credit-risk factors mortgage lenders and underwriters think about.
The Study On Credit Risk Factors
Researchers asked a sample of financial representatives in the United States and Canada what issues they are most concerned about and would cause them to decline the loan application.
Interestingly, what is at the top of the the list isn’t ones credit scores. Nor is it the size of your down payment. The item that is of most concern to mortgage lenders is your debt-to-income ratios or DTI. Almost 60 percent of risk managers consider the debt to income ratio for mortgage as their top consideration.
Most home buyers think FICO score and down payments are the key. And most home buyers don’t know or understand home lenders view the DTI. Or the debt to income ratio limits to be considered.
Debt To Income Ratio Factors
Here is a brief overview on just what goes into the debt to income ratio and why it is such a big red flag. Debt to income ratios are the most direct indication to a mortgage lender about whether or not a person will be able to repay the mortgage.
Debt to income ratios for home loans have two components.
First, is your gross income from all sources before taxes compared to monthly housing expenses. In the debt to income ratio calculation, housing expenses including the principal, interest, taxes and insurance to be paid on the home are added up.
Typically, lenders like to see the ratio of housing expense to gross monthly income to be at or below 28%. Needless to say there are expectations to the 28% based on other items in the mortgage application.
The second debt to income ratio component measures your income against all recurring monthly financial obligations a person must pay. This is referred to as the “back end ratio”. Payments for housing expenses, credit cards, student loans, personal loan payments and other items are included in this calculation.
Under federal “qualified mortgage” standards under the Dodd-Frank legislation that took effect in January, 2014, the back-end ratio of 43 percent is regarded the maximum. Once again, based on other factors there may be some wiggle room on a case by case basis.
However, the reality is that most lenders making loans eligible for sale to Fannie or Freddie prefer to see this ratio will under the 43 percent maximum. The study indicated the average home purchase applicant that was approved had a back-end ratio of 34 percent.
The FHA, which tends to be less strict, showed the average back-end ratio for buyers was 41 percent.
Any thing over 47% is a killer.
To learn more on debt to income ratios check out Fannie Mae’s information and tools to help you.
Mortgage Loan Consideration #2
The Fair Isaac Company survey identified the second biggest concern of mortgage loan officers is “multiple recent (credit) applications.”
New credit applications are revealed on a persons credit report. Lenders take new credit applications as signals that a person is potentially adding even more debt. Clearly, additional debt could affect the ability to payback the mortgage being requested..
And In Third Place
Surprisingly, In third place, is your credit scores. Most lenders want to see FICO scores well above 700 — Fannie and Freddie averages were in the 755 range in May, FHA average approved scores were a more generous 684.
If the income to debt ratios don’t work, it may be necessary to postpone your purchase until your debt to income ratio signals a “GO!”
If you are considering buying a home in Tucson Arizona or the surrounding areas, we can help. As top Tucson AZ Realtors we know the market and have the experience to make your home buying stress free.
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