I have many people who would like to buy a home in Orange County, CA who wonder if the banks are even lending right now.
Some would like to take advantage of the Huntington Beach First Time Buyer Program or the Fountain Valley First Time Home Buyer program but don't think they will be able to get a first mortgage.
I believe it's very important that potential buyers understand that they will only be able to use a particular percentage of their income towards their mortgage, and Chris Thomas does a great job of explaining how the numbers come together below.
It's important to make sure that your mortgage consultant does an accurate job of calculating your income and what your debt to income ratio is so that you can be approved for the correct loan amount. This is especially important if you are self employed, have more than one job, work hourly, receive bonuses or get over time.
If you have any questions, or would like to be referred to an experienced mortgage broker, please call me at 714.319.9751.
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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About the author: Christine Donovan is a California Residential Real Estate Broker with experience in assisting clients buy and sell residential real estate.
Are you upside down in your home? Is it worth less than you owe? Are you concerned about making your mortgage payment? For more information see Options to Foreclosures, understanding short sales or contact me at christine@donovanblatt.com to discuss your options.
If you want to buy a home or to list your property for sale, please click Newport Beach homes, Costa Mesa homes, Huntington Beach homes or Orange County homes. Click the link if you are interested in buying a home at a courthouse auction sale.
Contact me at christine@donovanblatt.com or 714-319-9751 to learn about her system which will make your buying and selling experience easier.
Disclaimer: All information in this blog is deemed reliable but is subject to change at any time and is not guaranteed to be accurate nor are there any warantees either express or implied. This blog is not intended to offer any legal, tax or other advice.
Federal Government Disclaimer (MARS)
- You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender [or servicer]. If you reject or accept the offer, you do not have to pay us.
- Christine Donovan, DonovanBlatt and Donovan Group are not associated with the government, and our service is not approved by the government or your lender; and
- Even if you accept this offer and use our service, your lender may not agree to change your loan.
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