Investor's Loan Guide by Graham W. Parham

percent is your current level of indebtedness. Fifteen percent each the time
you open credit has been in use (ten years old accounts are good, six months
old line items aren’t as good) and the types of credit available to you
(installment loans such as student loans, car loans, etc. versus revolving and
debit accounts like credit cards). Finally, five percent is pursuit of new credit —
credit scores requested.
Debt to Income Ratios
When you apply for a mortgage, your lender will analyze your debt-toincome,
which is also known as your debt-to-income ratios, or DTI. Lenders
calculate DTIs to ensure you have enough income to comfortably pay for a
new mortgage while still being able to pay your other monthly debts. There are
two debt-to-income ratios that your lenders will analyze: The Housing ratio,
which is the “front-end ratio” and the “Total” DTI, which are the back-end ratios
that are the most important. Your lender will add up your anticipated monthly
mortgage payment plus other monthly costs of homeownership. Other costs
of owning rental property could include homeowner association (HOA) fees,
property taxes, private mortgage insurance, and homeowner’s insurance.
Normally, some of these expenses are included in your monthly mortgage
payment. To calculate your housing ratio or front-end ratio, your lender will
divide your anticipated mortgage payment and property expenses by the
amount of your gross monthly income.
In addition to calculating your housing ratio, a lender will also analyze
your total debt ratio. At this time your other installment and revolving debts will
be analyzed and added together. Installment and Revolving debts will appear
on your credit report. These payments are expenses like minimum monthly
credit card payments, student loan payments, alimony, child support, car
payments, etc. Your lender will add up all your monthly installment and
revolving debts in addition to your estimated monthly mortgage payment and
housing expenses and divide that number by your monthly gross income.
With the New “Ability to Repay” in force, Qualified Mortgages are
required to have a back-end ratio no greater than a 43% to be eligible to
deliver the loan to the Fannie Mae or Freddie Mac. Fortunately, we have a
temporary reprieve that allows qualifying ratios to exceed 43% DTI as long as
the automated underwriting system approves the loan. This temporary
exception will be in place until Fannie and Freddie come out of receivership,
or seven years whichever comes first.
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