ou applied for a loan two weeks ago, and you gave your loan officer everything he asked for. The appraisal has been done, but you don’t have a commitment yet. You call your loan officer, and he says your loan is with the underwriter. Finally, he gets on the phone and says, “Your DTI is too high. It’s not going through DU.”
Houston, you have a problem.
DTI stands for debt-to-income ratio. There is a “front” ratio and “back” ratio. The front ratio is calculated by taking your mortgage payment (which includes principal, interest, taxes, insurance, and private mortgage insurance if applicable). If you are buying a condo, it also includes homeowner association dues. If you’re buying a co-op, it also includes the monthly maintenance fee. That mortgage payment then gets divided by your monthly income. So if your mortgage payment is $1500 a month, and your income is $54,000 a year or $4500 a month, your front ratio is 1500/4500 or 33%.
Your back ratio is calculated by taking the mortgage payment plus all other debt. Other debt consists of payments on student loans, car loans, car leases, credit card debt, other real estate, boat loans. Let’s say your other debt is $995. So we would add $1500 and $995 and get $2495 then divide that by $4500 and get a back ratio of 55%.
According to your loan officer, that ratio is too high. It’s not going through. Going through what? Automated underwriting. Most lenders use Fannie Mae’s automated underwriting system called Desktop Originator (for direct seller servicers) or Desktop Underwriter (for lenders who do not sell direct to Fannie Mae). Many people in the industry lump them together and refer to them as DU. When you run a loan through DU, your lender is submitting your loan application and credit report to Fannie Mae and asking for an approval. If your loan doesn’t go through DU, it means it has failed to meet Fannie’s guidelines, and here your loan officer is saying it’s because your DTI is too high.
What can you do? You really want to buy this house. You’ve already put your house on the market. You’re planning on moving in a couple of months.
You tell your loan officer you want to go over the numbers with him, because at the outset, before you applied, your loan officer told you that your income met the guidelines for the loan you were seeking.
He makes an appointment with you at his office. You sit down and look at how they calculated other debt. They give you the breakdown: $91 a month on assorted credit cards; $178 a month on your student loans; $278 a month on your Honda; and $448 a month on another car loan. You look up in disbelief. “That’s not mine! It’s my sister’s car. I just co-signed for her.”
Your loan officer looks relieved. “Would she give us 12 months canceled checks showing she makes the payment and not you?”
You call your sister; ask her; she says yes. Soon, she’s faxing over the canceled checks. The underwriter reviews the checks and removes the $448 payment from your other debt. Now your back ratio is 45%.
The next day, your loan officer calls. “Good news! Your loan has been approved!”
Insider’s Tip: if your loan officer tells you your ratios are too high, get a breakdown of what debt they’re including in your ratios — there may be something they could leave out with the right documentation
To find out what your ratios are and if you qualify for the loan you’re seeking, call Amerifund at (888) 650-7316 or fill out this form and someone will contact you.