There seems to be some confusion among many agents (and loan officers) about the maximum debt ratios that FHA is approving.
Currently most investors are still imposing hard "Debt To Income" (DTI) ceilings on FHA borrowers, that were in place 2 years ago (when the market was a mess) and have fallen into a "comfort zone" for underwriting loans.: 45% as the recommended max DTI, with the absolute "drop dead" being 50%.
Because FHA does not impose a "hard ceiling" for debt ratios this is now rapidly changing.
Now new investors are aggressively entering the market place and competing for a bigger a share of the FHA pie.
These new investors are basing their approvals up to 55% DTI. If FHA agrees to buy the loan there is no risk to the investor. The loan is insured by a hefty PMI (aka" MIP") upfront premium of 1.75% and a monthly premium of 1.35%.
It takes just 30 minutes to determine if FHA will approve your buyer by analyzing the borrower's information thru FHA's "DU" ("desktop underwriting") program.
If the loan is approved, the borrower can buy the home….and you earn your commission!
Here (in order) are the factors FHA considers when "expanding the debt ratios" in a typical transaction:
1) Down Payment: Typically borrowers get in for the minimum 3.5 % down payment. If your borrower is putting down 10% (or more), you are well on your way to a commission check.
2) Liquid Reserves: A borrower may put down only 3.5% but if they have liquid reserves (401k, IRA, savings, etc.) the investor looks very favorably upon that borrower.
3) Credit History: If your borrower has over a 720 (median) FICO score, FHA sees the file VERY favorably (the average FHA borrower has a 660 median FICO score).
4) Length of time on a job and source of borrower's income: For example if your borrower has bonus / overtime/ commissions or a second job, there must be a two year history. If any of these incomes are in "decline" your borrower is in trouble.
Once a borrower's information is "analyzed " thru underwriting program, the results come back as one of the following:
b) Refer Eligible
c) Approved Ineligible
d) Refer Ineligible (i.e. Declined)
A1: The status: "Accepted/Eligible" is obvious. "Pass Go" and collect your commission check.
A 2: The status: "Refer/Eligible" is a little more nuanced. This is where the experience of your loan officer and the relationship with the borrower is critical.
For all practical purposes, "refer" means referred to the underwriter (U/Ws) who, based on vast their experience, makes a judgment call if the borrower is able to maintain the loan payments. In other words "underwriters" are the "Gatekeepers of Our Commissions" and should be treated that way.
Repeatedly (over my 28 year career) I have heard loan officers being rude and / or confrontational towards U/W s which rarely works out for their (or their agent's!) commission checks.
When dealing with U/Ws the loan officer must be patient and thorough BEFORE submitting the package to the investor. The more issues left unaddressed (credit/debt/income) before the file is submitted will increase the chance the loan is declined. Like parents, it's always easier to say "no" than "yes".
A3 : Approved/ Ineligible: This means your borrower is VERY marginal and does not fit into the program that they were submitted into. Most commonly the borrower’s debt ratios are too high for a fixed rate loan and needs to be resubmitted to a lower adjustable rate program.
Or perhaps the borrower needs to pay off debts or have a larger down payment. In any case, the deal may be salvageable.
A4: Refer/Ineligible: The deal is dead. In fact the application should never have been originated. The loan agent has just wasted your time, soured your client's confidence in you and cost you referrals.
I Fix Broken Deals!!
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Capital Mtg. Services
265 S. Randolph #165
Brea, Ca. 92821
Cell: 949 250-3981 Fax 949 716 2059
DRE # 00986886 …..NMLS# 307631