Debt service to income ratio for home equity loan
Question: I have read that a 31/36% split is the typical upper limit for a home mortgage, that is the monthly payment for mortgage, taxes etc should be no more than 31% of gross montlhy income and total debt service not more than 36%. Is the same typically true for a home equity loan?
My apologies if my terminology is wrong and corrections are welcome.
Answer: What you are referring to is the maximum Debt to Income Ratio, a lender will grant credit on. It is based on your gross monthly income.
Actually, standard Fannie Mae and Freddie Mac guidelines are 28% for proposed monthly housing payment and 36% for Total Debt to Income which includes the proposed monthly housing payment and any revolving and installment monthly debts. Total monthly housing payment is referred to PITI (principal, interest, taxes and insurance) The Total Debt to Income Ratio also include home equity loan and 2nd mortgage monthly payments.
The 28/36 standard can be deviated from with compensating factors on a case by case basis if the lender is going to sell your loan to Fannie or Freddie (I know b/c my hubby worked for Freddie) In fact, a lot of lenders normal qualifying ratios go up to 45% for both the housing ratio and total debt to income ratio. These ratios can be tiered due to several other factors, i.e, credit score, loan to value, etc. Again I have even seen ratios more than 45% be approved due to automated underwriting and compensating factors.
All of the above info is assuming you are doing a Full Doc Loan with verified income and employment. There are other Doc Types, Stated Income (has to be reasonable and credible for your profession) and No Doc (No income or employment stated). However, since you furnish less info, the rates are higher.
Hope I’ve helped you. If you have any additional questions, contact me. http://www.windsorcap.com/jnewton EMail jnew…@mortgageloansolutions.com
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