Financing in Roseville>Question Details

Mlridg, Home Buyer in Roseville, CA

Will low debt-to-income ratios help to qualify if the other requirements for a mortgage are not stellar?

Asked by Mlridg, Roseville, CA Mon Jan 14, 2013

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Help, YES, OVER COME probably not. Good income to debt ratios are a key factor to getting a loan approved but credit profile and down payment are equally as important and all pieces tot he puzzle are required for a traditional loan. There are alternative lending sources that are mainly based on INCOME and DOWN PAYMENT. In that case YES a low income to debt ratio would help qualify IF you are open to alternative financing.
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0 votes Thank Flag Link Sun Jul 21, 2013
It would help. However, a low DTI is only one of the facets that is taken into account when it comes to preapproving a buyer. It also will not offset a low FICO, severely blemished credit, or a spotty employment history.
0 votes Thank Flag Link Mon Jan 14, 2013
Depending on what you are talking about yes, maybe. But also maybe not.

In an underwriting analysis a low debt-to-income Ratio (DTI) is a positive thing. When looking at the factors in an approval (or decline) - credit (your history of making payments), capacity (your income/assets/ability to repay the loan), and collateral (how much the home is worth) - a low DTI can compensate for a lower credit score or higher loan-to-value ratio (LTV).

However it will not make any difference if the loan does not meet certain requirements. Lets say the loan program requires a minimum FICO score of 640 and the borrower's score is 619, even if their DTI was 10% it would not help because the loan does not meet the minimum standards.

The VAST majority of mortgages these days are underwritten by automated systems such as Fannie Mae's Desktop Underwriter or FHA's Total Scorecard. These take in the minimum requirements of the loan but also the strengths and risks when it comes to credit score/history, debt ratio, assets, and loan to value ratio. These systems have built in algorithms that work together to determine if a loan can be approved or not. This is where a relatively low DTI will be very helpful and can compensate for risks in other areas such as certain credit issues or a low down payment/lack of equity.

If a loan cannot be approved by an automated system it can often also be manually underwritten. In this case it is also very helpful to have a low DTI. In this case the underwriter will use it as a compensating factor when approving (or declining) the loan.

So the answer really is; it depends. But yes, sometimes a lower debt ratio can be the difference between an approval or not.

Greg Cowart

Mortgage Advisor - 16 Years Experience

Partners Mortgage
Roseville, CA
0 votes Thank Flag Link Mon Jan 14, 2013
Lenders look primarily at 3 things:
Your track record of paying your bills,
You Debt/Income ratio
Your Income.

If you need a Mortage person you can trust;
call Dominic Sylvestri; he's in Northern California
0 votes Thank Flag Link Mon Jan 14, 2013
Yes, a low debt-to-income ratio is considered a "compensating factor" that can help if other aspects of your profile are borderline - so it can help. However if there is one part of your situation that doesn't qualify (such as a score lower than the minimum required, or if you have less than the amount of financial reserves required) then compensating factors cannot help overcome that. An example of where they could help is if your credit score meets requirements but you have had an isolated late payment within the most recent 12 months, or if the loan program doesn't require any reserves and you don't have any reserves anyway (an underwriter may feel uneasy in that situation, but would see that you have a lot of extra/residual income each month and then feel more comfortable). Every person's situation is reviewed based on it's own merits though.

Shane Milne | Lending in all 50 states | NMLS #81195
0 votes Thank Flag Link Mon Jan 14, 2013
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