This article will cover the updated debt-to-income ratio guidelines on government, conventional, jumbo, and non-QM loans at Gustan Cho Associates. All home mortgage programs have agency guidelines when it comes to debt-to-income ratios. Eric Jeanette of Gustan Cho Associates said the following:
If homeowners have a homeowner’s association fee, that monthly fee is calculated as part of the monthly housing payment when calculating the front-end debt-to-income ratio. Only qualified income can be used by lenders when calculating debt-to-income ratios.
The updated guidelines on debt-to-income ratios on traditional 90% LTV jumbo mortgages at Gustan Cho Associates is 50% DTI. This new jumbo loan program at Gustan Cho Associates only requires a 660 credit score. Gustan Cho Associates have debt-to-income ratios updated guidelines on VA loans. We can go up to 65% DTI on VA loans with an approve/eligible.
Front-End and Back-End Debt-To-Income Ratio Guidelines
The back-end debt-to-income ratio is the sum of all monthly debts divided by the borrower’s qualified income. The front-end debt-to-income ratio is the housing payment divided by the borrower’s monthly gross income. The monthly housing payment includes the principal, interest, taxes, insurance, or PITI.
Fannie Mae and Freddie Mac set agency mortgage guidelines on conventional loans. The maximum debt-to-income ratio on conventional loans is 50% DTI. There is no front-end debt-to-income ratio caps on conventional loans.
Besides the full-time income of the borrower, other income can also be used as long as it is considered qualified income. FHA, VA, USDA, and Conventional loans have agency guidelines on debt-to-incomes.
Debt-To-Income Ratio Guidelines on FHA Loans
To get an approved/eligible per automated underwriting system (AUS) on FHA loans, the maximum front-end DTI cannot exceed 46.9%, and the maximum back-end DTI cannot exceed 56.9%. Michelle McCue, Vice President of Mortgage Lending at Gustan Cho Associates, is a manual underwriting expert on FHA and VA loans. Here is what Michelle said about manual underwriting:
The only difference between manual versus automated underwriting system on FHA and VA loans is the DTI reduction on manual underwrites. However, mortgage underwriters has underwriter discretion on extending the debt-to-income ratio caps on manual underwriting.
Manual underwriting debt-to-income ratios on FHA loans depend on the number of compensating factors. The maximum debt-to-income ratios on manual underwriting FHA loans are 40% front-end and 50% back-end with two compensating factors. We will discuss more on debt-to-income ratios on manual underwriting FHA loans in the next paragraph.
Debt-To-Income Ratio Manual Underwriting Guidelines on FHA Loans
One month’s reserves are required for manual underwriting. The maximum debt-to-income ratios on FHA manual underwriting is as follows:
- 31% front-end and 43% back-end DTI with no compensating factors
- Maximum of 37% front-end and a maximum of 47% back-end DTI with one compensating factor
- Maximum of 40% front-end and a maximum of 50% back-end DTI with two compensating factors
Compensating factors are important for borrowers with higher debt-to-income ratios on manual underwriting.
What Are Compensating Factors
Compensating Factors are very important when it comes to manual underwriting. The following are considered compensating factors for manual underwriting on FHA loans:
- Low payment shock of 5% or less or no greater than $100 from what the borrower was paying for rent and the new housing payment
- Reserves of three months or more are considered compensating factors
- Having a second job or other qualified income for at least one year that is not used in qualifying for the home mortgage
- A habit of saving money and reserves
- Larger down payment than the minimum of the 3.5% down payment required
- Longevity in the same job or field and consistent periodic promotions and pay raises
FHA and VA loans are the only two home mortgage programs that allow manual underwriting. VA and FHA have similar mortgage guidelines regarding manual underwriting about debt-to-income ratio caps. VA is more lenient when it comes to debt-to-income ratios on manual underwrites. We can stretch the maximum debt-to-income ratio to 55% on VA loans with compensating factors.
Mortgage Guidelines Debt-To-Income Ratios on VA Loans
VA loans are the best home mortgage program in the nation. However, you must be eligible with a certificate of eligibility (COE) to qualify for VA loans. Only active and retired U.S. military members with a COE are eligible for VA loans.
VA loans have no down payment requirements. Lenders can offer 100% financing at competitive mortgage rates without insurance on VA loans due to the government guarantee.
Then why is it that most lenders have a minimum credit score requirement? This is because of lender overlays. All lenders need to have their borrowers meet the minimum VA Agency Mortgage Guidelines.
What Are Lender Overlays?
Lenders can have higher lending requirements above and beyond the minimum VA Agency Guidelines called lender overlays. Gustan Cho Associates is one of the few lenders with no lender overlays on VA loans. Michael McCue of Gustan Cho Associates said the following about VA loans:
There is no maximum debt-to-income ratio requirement with an approve/eligible per automated underwriting system on VA loans. There are no minimum credit score requirements on VA loans. However, lenders can impose minimum credit score requirements and maximum debt-to-income ratio caps on VA loans.
Gustan Cho Associates only goes by the automated underwriting system’s automated findings and has no additional lender overlays. VA loans have no maximum loan limit, annual mortgage insurance, minimum credit score requirements, or maximum debt-to-income ratio caps.
Debt-To-Income Ratio Guidelines on USDA Loans
Lenders offer 100% financing on USDA loans due to the government guarantee of the USDA. USDA loans are only limited to areas where the USDA classifies the area eligible for USDA loans.
There are maximum household income restrictions. The maximum front-end DTI is 29%, and the maximum back-end cap is 41%.
USDA loans are a very popular loan program in rural areas that enable homebuyers to purchase a home with no down payment required. USDA loans are very popular in Southern and Western states with rural areas.
Fannie Mae And Freddie Mac Guidelines on Debt-To-Income Ratios on Conventional Loans
Conventional loans are often referred to as conforming loans. This is because conventional loans need to conform to Fannie Mae or Freddie Mac Guidelines. Conventional loans do not have a maximum front-end debt-to-income ratio cap. The maximum debt-to-income ratio cap on conventional loans is 50% DTI.
Why Choose Us at Gustan Cho Associates
Gustan Cho Associates has no lender overlays on government and conventional loans. Gustan Cho Associates goes off the automated underwriting system findings and has no additional lender overlays on FHA, VA, USDA, and Conventional loans.
The Department of Veterans Affairs will insure and partially guarantee the loss sustained by lenders if the borrower defaults and forecloses on their VA loan.
To qualify for a mortgage with a five-star national mortgage company with no lender overlays on government and conventional loans, please contact us at 800-900-8569. You can text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays. We are experts in helping borrowers with bad credit and credit scores down to 500 FICO.
