Confused about Housing Ratio

[bbowen530]

Hello! 

I met with a lender today and was left a bit confused on the housing ratio. 

My current situation is as follows: 

- Income: $210,000 a year 

- Debt: NONE  

- Mortgage scores (5,4,2): 763, 757, 774

- Spouses' mortgage scores (5,4,2): 780, 800, 773

- Funds available for down payment/closing costs: $410,000

- Other assets (401K): $110,000

I was hopeful that because my wife and I have been living without any debt for the last 5 years we could increase our housing ratio beyond 28%. 

However, the lender said having no debt only help us gain more in the front end, but not the back end of the 28/36 ratio. 

Can someone help explain this to me? 

Is there really no incentive to have zero debt beyond the fact that it helps us achieve the 28% front end ratio? 

To clarify, I asked the lender that even if we had debt that pushed us to 36% total DTI,  would that change the 28% housing we were allowed, and he said no. 

Also, to add: we are in the Bay Area...not trying to be greedy and in over our heads with getting a house over 28% housing ratio...but it's slim pickings out here. We were really hoping that having zero debt would help get us at least to a 30% housing ratio.

Thanks so much in advance! 

[ShanetheMortgageMan]

Sounds like the lender you spoke with is more confused, or who they work for has some serious overlay guidelines, because a housing ratio up to 50.49% can still qualify for conventional financing - although the majority of people usually max out at 45%.  Not aware of any programs that still go by 28/36% ratios.  Even jumbo loan programs will allow housing & total ratios up to 43% and there are some that will go as high as 55%.  Lastly, even USDA financing, which arguably has the most conservative debt ratios, will allow housing ratios into the low 30's and total debt ratios into the mid 40's for 680+ scores.

What price range are you trying to qualify for?

[Diane_Brightstar]

1. Housing expense ratio, also called the front-end ratio. It is a percentage determined by dividing the monthly housing expenses by monthly gross income. For most people they think the housing expense is just mortgage payment. In fact, it is not only include monthly mortgage (principal and interest), but also taxes and insurance, etc. Debt if not housing expenses related, plays no role here.
2. You’d like to keep housing exp ratio as low as possible. Most traditional mortgage lenders require a maximum 28% for loan approval.
3. DTI or debt-to-income ratio, also called the back-end ratio. It is a percentage determined by diving the recurring debts + the housing expenses by gross income. Debt plays a big role in this calculation. 36% is the maximum for traditional lenders to approve a loan. 
4. Thus I will say No Debt won’t impact the housing ratio, but certainly be helpful to DTI calc. Otherwise, you would have a higher DTI.

[rileydude]

I agree with Shane..you must have a lender with a very strict and conservative front end overlay, I would not hesitate to reach out to other lenders. While it is desirable to keep it below 28% traditionally,  most will go into the 30s..as long as your back end ratio will not exceed the allowed maximum, based on the loan program you choose..which as mentioned is in 40s..in some cases up to 49% total ration. The only way to lower your front end is either a larger down-payment, or a better rate if you decide to stay with this lender..

[bbowen530]

The price of the home ideally would be around 1 million to 1.1 million. But there are just so few homes within that range where we are in the Bay Area, so we were hoping to get approved for up to 1.3 to give us a little more to look at and not have to go through the entire process sweating bullets that we weren't going to be approved at the last minute of escrow. 

[ShanetheMortgageMan]

At a $1.3MM sales price with 20% down it'd put your DTI at around 47-48%, which can qualify for Fannie Mae/Freddie Mac conforming loan programs.  You'd still have $150k (minus closing costs) + $110k in the 401k remaining to use as reserves & an excellent credit score as compensating factors, which both will help a DTI over 45% get approved.  I'd say you'd have a pretty good chance at passing automated underwriting for a pre-approval.