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Worried about High DTI Ratio? No More! FHA and VA Loans Have You Covered!

May 14, 2024blog0

Are you worried about your debt-to-income ratio? Is the ratio making it hard to get a loan? Don’t worry! Dream Home Mortgage believes in making your dream a reality irrespective of your DTI ratio. There are plenty of options to get decent high debt to income ratio loans. The most common and safest solutions are FHA and VA loans. Surprised? Don’t be! You can get a decent FHA or VA loan even if you have a high DTI ratio. Let us show you how.

FHA Loans

FHA loans are a great choice for people who have a lot of debt compared to their income (DTI). They can help people become homeowners even when they can’t get other loans. Since these loans are backed by the Federal Housing Administration (FHA), the DTI limits are less strict than with many other high debt to income ratio loans. Most of the time, FHA loans can handle DTI rates of up to 43%. In some cases, with strong supporting factors, they can go even higher.

What supporting factors?

  • Larger down payment.
  • Reserves
  • Minimal increase in housing payment.
  • Additional income.
  • Stable and long employment history.
  • Low obligation levels.

One great thing about FHA loans is that they don’t require a big down payment. People with a FICO® score of at least 580 can get a loan with a down payment as low as 3.5%. This helps people with high DTI rates the most because it lowers the amount of money they need up front, making housing easier for them to get. People whose credit scores are between 500 and 579 need to make a 10% down payment, which is still less than most standard loans.

Also, FHA loans are known for being flexible when it comes to credit background. People who have been through bankruptcy or debt can still get a loan if they meet other requirements.

See what you qualify for

These requirements include:

  • Waiting period: FHA loans generally require a waiting period of two years after bankruptcy and three years after a foreclosure.
  • Credit score improvement.
  • Stable income.
  • Debt-to-income ratio maintenance.
  • Establishment of new credit accounts.
  • Provision of larger down payments.
  • No new negative credit events.

This flexibility of FHA high debt to income ratio loans helps people get back on track financially. Furthermore, the Mortgage Insurance Premium (MIP) rule protects the lenders and encourages them to give loans to a wider range of applications, even those with higher amounts of debt.

For loans backed by the Federal Housing Administration (FHA), the Mortgage Insurance payment (MIP) rule says that there must be an upfront fee and a yearly insurance payment. The upfront (one-time) charge is a percentage of the home’s sales price, and the annual premium is part of the monthly mortgage payment.

With this protection and government backed security, lenders can give loans to people who might not be eligible otherwise because they are seen as too risky.

More about the MIP Rule

To protect lenders in case a borrower doesn’t pay their mortgage, the Mortgage Insurance Premium (MIP) is an important part of FHA loans. All people who get an FHA loan must pay MIP, which has both an upfront and a yearly payment.

1.75% of the loan amount is usually the MIP that you pay up front. This cost can be built into the mortgage, so the client doesn’t have to pay it all at once at closing. Instead, it can be spread out over the life of the loan. The yearly MIP is paid every month and is different for each loan amount, length, and loan-to-value (LTV) percentage at the start. The MIP for most loans with terms longer than 15 years is between 0.45% and 1.05% per year.

High DTI Loan

The LTV ratio at the time the loan is taken also affects how long the MIP must be paid. Many loans with a starting LTV of more than 90% need MIP for the whole life of the loan. If the LTV is 90% or less, after 11 years, MIP can be stopped. This setup keeps FHA loans available to people with smaller down payments and less-than-perfect credit, and it also keeps the financial system safe from possible losses.

VA Loans

If you are an active or out-of-service soldier, you are in luck, thanks to the superb high debt to income ratio loans offered by the the Department of Veteran Affairs. They have open rules that make it possible for soldiers and current military members to get a VA loan even if they have a high debt-to-income (DTI) ratio. A lot of people say that 41% is the best DTI ratio for a VA loan, but the VA doesn’t set a hard ceiling. Instead, individual lenders decide if a borrower is eligible by looking at their DTI, credit score, and other financial factors.

There are still a few ways you can get a VA loan even if your DTI ratio is higher than 41%. One important step is to show that you have enough leftover cash. People who want to get a VA loan must have a certain amount of money left over each month after paying off all their bills. This amount changes based on the size of the family, the loan amount, and where the family lives. If your DTI is higher than the recommended level, you may need to make at least 20% more than the usual amount of leftover income. If a loan usually needs $1,800 in leftover income for a DTI of less than 41%, they will need at least $2,160 if the DTI is higher than 41%.

Including cash that isn’t taxed in your financial analysis is another thing that can help. You can lower your DTI by getting income that isn’t taxed, like military pay, disability benefits, child support, or workers’ compensation. Taking this into account can greatly improve your chances of getting a loan.  Finally, changing the amount of the loan you want can also help. If you choose a smaller loan, you might have lower monthly payments, which would make your DTI more in line with the loan amount.

Get approved to see what you can afford.

Dream Home Mortgage® lets you do it all online.

Pre-Qualify Now

That’s Not It!

You have a lot of other high debt to income ratio loan options as well. For example, the following loans can be considered if you are unsure about the above-discussed ones.

  1. USDA Loans
  2. Non-Qualified (Non-QM) Loans
  3. Freddie Mac’s Home Possible
  4. Fannie Mae’s HomeReady® Program

So, stop worrying. Meet with us today to know everything about your options and if you are still confused about something, ping us in the comments section.

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