High-Debt-Ratio-FHA-LoansFHA Loans

Up to 49% DTI

620 Credit score Min.

There seems to be some confusion among many agents (and loan officers) about the maximum debt ratios that FHA is approving.

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With many banks and credit unions are imposing hard “Debt To Income” (DTI) 43% ceilings on FHA borrowers, many agents are losing out on commissions.

Those DTI calculations are a myth because FHA does not impose a “hard ceiling” for debt ratios.

If you have a buyer with higher than normal DTIs, give me just 30 minutes to determine if FHA will approve your buyer by analyzing the borrower’s information thru FHA’s “DU” (“desktop underwriting”) program or using “manual underwriting”.

Either way, if the loan is approved, the borrower can buy the home and you earn your commission!

Here (in order) are the factors FHA considers when “expanding the debt ratios” in a typical transaction:

1) Down Payment: Typically borrowers get in for the minimum 3.5 % down payment. If your borrower is putting down 10% +, you are on your way to a commission check.

2) Liquid Reserves: A borrower may put down only 3.5% but if they have liquid reserves (401k, IRA, savings, etc.) the investor looks favorably upon the borrower.

3) Credit History: If your borrower has over a 720 (middle) FICO score, FHA sees the file VERY favorably (the average FHA borrower has a 660 median FICO score).

4) Length of time on a job and source of borrower’s income: If your borrower has bonus / overtime/ commissions or a second job, there must be a two year history.

If bonuses/OT disbursement incomes are in “decline” from the previous year the lender will use the lesser of the 2 years.

Once a borrower’s information is “analyzed ” thru a computerized underwriting program, the results come back as one of the following:

a) Accepted/Eligible
b) Refer Eligible
c) Approved Ineligible
d) Refer Ineligible (i.e. Declined)

A1: The status: “Accepted/Eligible” is obvious. “Pass Go” and collect a commission check.

A 2: The status: “Refer/Eligible” is a little more nuanced. This is where the experience of your loan officer and the relationship with the borrower is critical.

For all practical purposes, “refer” means referred to the underwriter (U/Ws) who, based on vast their experience, makes a judgment call to approve the loan. In other words “underwriters” are “Gatekeepers of Our Commissions” and should be treated that way.

When dealing with U/Ws the loan officer must be patient and thorough BEFORE submitting the package to the investor. The more issues left un-addressed (credit/debt/income) before the file is submitted, the more likely the chance the loan is declined.

As with parents, it’s always easier to say “no” than “yes”.

A3: Approved/ Ineligible: This means your borrower is VERY marginal and does not fit into the program that they were submitted into. Most commonly the borrower’s debt ratios are too high for a fixed rate loan and needs to be resubmitted to a lower adjustable rate program.

Or perhaps the borrower needs to pay off debts or have a larger down payment. In any case, the deal may be salvageable.

A4: Refer/Ineligible: The deal is dead.

In fact, the application should never have been originated. The loan agent has just wasted your time, soured your client’s confidence and cost you future referrals.