The Smooth Loan Process #2010-13

Debt Ratios--The Most Exciting Part of Your Application

Actually, debt ratios are not very exciting at all. They are important though, especially in this new age of mortgage financing. By new age I mean fully documented loans since the demise of the three Russian sisters (SIVA, SISA and NINA).

These days (just like the old days, by the way), we have to verify that your income will support the house payment along with your other debts. Every loan program has it's guidelines as to what the debt ratios should be. In most cases, the guidelines can be expanded based on the overall strength of the borrower. There are two kinds of debt ratio to talk about. Front-end and Back-end. The front ratio is the percentage of total gross monthly income that is being used for the monthly house payment. The house payment is principal and interest, property taxes, homeowners insurance, mortgage insurance (if applicable) and HOA. The back is the percentage of total gross monthly income that is being used for all monthly debt.

The monthly debts that are considered in the ratios are the minimum monthly payments on credit cards, student loans, auto loans, personal loans and alimony or child support to name a few. Things like phone, insurance or utilities are not considered in the ratios. Essentially, if it's a loan of some sort or payments ordered by a court, it's going to count in your debt ratios.

Guidelines for FHA are 31/43. Front ratio of 31 and back ratio of 43. Some very strong borrowers get approved up to a back ratio of 55, but that is rare these days. 50 is pretty much the reality of things now.

VA and USDA loans are 29/41. Again 50 is pretty much the max for a very strong borrower.

Conventional loans are 28/36. With less than 20% the loan will not be approved if the back ratio is over 41% in Arizona. The MI companies will not allow it. With 20% down or more, 55 back ratio is the max.

These are just guidelines. Nothing is set in stone and there may be strategies to lower your debt ratio to help with qualifying. Please dont assume that you will not qualify if you think your debt ratios are higher than 43. Call your Loan Officer and have him/her take a look.

The Smooth Loan Process lesson for today: Debt ratios are just one piece of the puzzle. Talk to your Loan Officer to get the full picture.

Harold Perkins
Galaxy Lending Group, LLC
602-595-1233
Harold@HaroldPerkins.com