Do you need to consider your home loan options? FHA mortgages offer much for both first-time buyers and repeat borrowers. Your choices include new purchase loans, One-Time Close construction loans, reverse mortgages, cash-out FHA refinance loans, and Streamline refinance options when you’re ready to consider a refi loan.
No matter what kind of loan you need, for best results you should set aside some time in the early stages of your loan planning; review the last 12 months of credit and loan repayment history and have a good look at your debt-to-income ratio. It is vitally important to do this before the lender does.
The Amount Of Debt You Carry Matters
The debt to income ratio or DTI for short is one of the most important factors in the lender’s decision to approve or deny a home loan. DTI can be just as weighty as a credit score when it comes time to approve the mortgage. How does the lender view your DTI?
DTI is a fairly simple calculation your lender makes by taking your verifiable income compared to the amount of your monthly financial obligations.
This ratio is calculated with and without your mortgage payment. This is done in order to ensure a borrower can realistically afford the mortgage payment.
How Your Lender Determines Your Debt Ratio
The FHA Single-Family Home Loan rulebook, HUD 4000.1, instructs the lender on how to calculate the DTI:
“The Mortgagee must review all credit report inquiries to ensure that all debts, including any new debt payments resulting from material inquiries listed on the credit report, are used to calculate the debt ratios.
The Mortgagee must also determine that any recent debts were not incurred to obtain any part of the Borrower’s required funds to close on the Property being purchased.”
What does the term, “material inquiries” mean? “Material Inquiries refer to inquiries which may potentially result in obligations incurred by the Borrower for other Mortgages, auto loans, leases, or other Installment Loans. Inquiries from department stores, credit bureaus, and insurance companies are not considered material inquiries.”
How The Lender Gathers The Information
How does a participating FHA loan officer acquire this debt information; HUD 4000.1 explains, “The Mortgagee must determine the Borrower’s monthly liabilities by reviewing all debts listed on the credit report, Uniform Residential Loan Application (URLA), and required documentation. All applicable monthly liabilities must be included in the qualifying ratio.”
This is why it’s important to avoid opening new lines of credit in the 12 months or so leading up to a home loan application, and instead work hard to reduce existing debt.