The Debt to Income Ratio (DTI) DTI Ratios: In general, the lender assesses the adequacy of the borrower's

income in terms of two ratios that have become standard in the trade. The first is called the "housing expense ratio" and is the sum of the monthly mortgage payment including mortgage insurance, property taxes and hazard insurance divided by the borrower's monthly income. The second is called the "total expense ratio" and it is the same except that the numerator includes the borrower's existing debt service obligations. For each of their loan programs, lenders set maximums for these ratios, such as, e.g., 28% and 36%, which the actual ratios must not exceed. Variations in the Ratios: Maximum expense ratios actually vary somewhat from one loan program to another. Hence, if you are only marginally over the limit, nothing more may be required than to find another program with higher maximum ratios. This is a situation where it is handy to be dealing with a mortgage broker who has access to loan programs of many lenders. But even within one program, maximum expense ratios may vary with other characteristics of the transaction, and this can work against you. For example, the maximum ratios are often lower (more restrictive) for any of a long list of program "modifications", such as, e.g., the property is 2-4 family, co-op, condominium, second home, manufactured, designed for investment rather than owner occupancy, the borrower is self-employed, the loan is a cash-out refinance, and combinations of any of these. Borrowers' Ability to Raise the Maximum Ratios: The maximum ratios are not carved in stone if the borrower can make a persuasive case for raising them. The following are illustrative of circumstances where the limits may be raised. * The borrower is just marginally over the housing expense ratio but well below the total expense ratio 29% and 30%, for example, when the maximums are 28% and 36%. * The borrower has an impeccable credit record. * The borrower is a first-time home buyer who has been paying rent equal to 40% of income for 3 years and has an unblemished payment record. * The borrower is making a large down payment. Reducing Expense Ratios by Changing the Instrument: If expense ratios exceed the maximums, one possible option is to reduce the mortgage payment by changing the instrument. If the term is 30 years, you can extends it to 40 years, you can select an interest-only version, or you can switch to an option ARM. The first lowers the payment a little by extending the term; the second reduces it further by eliminating the principal payment for 5-10 years; the third reduces it even more by adding part of the interest due to the balance. See 40-Year Loan, or Modify the 30 and 15?; Interest-Only Mortgage Tutorial; and Tutorial on Option ARMs. The third option became unavailable following the financial crisis. Using Excess Cash to Reduce Your Expense Ratios: If you have planned to make a down

payment larger than the absolute minimum, you can use the cash that would otherwise have gone to the down payment to reduce your expense ratios by paying off debt, paying points to reduce the interest rate, or funding a temporary buydown. The first two approaches will work only in a small percentage of cases, however. For example, paying an extra 2.625 points to reduce the rate from 7% to 6.375% will reduce your housing expense ratio by only about 1 percentage point. This assumes, furthermore, that the reduced down payment does not push you into a higher mortgage insurance premium category, which would offset most of the benefit. This happens when the smaller down payment brings the ratio of down payment to property value into a higher insurance premium category. These categories are 5 to 9.99%, 10 to 14.99% and 15 to 19.99%. For example, a reduction in down payment from 9% to 6% wouldn't raise the insurance premium, but a reduction from 9% to 4 % would. See Shrewd Mortgage Borrowers Know Their PNPs. Using the extra cash to pay off debt will work only if a) you exceed the maximum total expense ratio but not the maximum housing expense ratio (your ratios are 27% and 38%, for example, when the maximums are 28% and 36%); and b) your existing debts have short terms and high rates. For example, if you increase your loan by 2.6% and use the increase to repay debt, and if the debt has an average rate of 15% and is being repaid over 5 years, you would reduce your total expense ratio by about 2 1/2 percentage points. Much the most effective way to reduce both expense ratios is to use a temporary buydown, which some lenders allow on some programs. With a temporary buydown, cash is placed in an escrow account and used to supplement the borrower's payments in the early years of the loan. For example, on a 2-1 buydown, the mortgage payment in years one and two are calculated at rates 2% and 1%, respectively, below the rate on the loan. The borrower makes these lower payments in the early years, which are supplemented by withdrawals from the escrow account. The expense ratios are lower because the payment used is the "bought down" payment in the first month rather than the total payment received by the lender. For example, assuming a market interest rate of 7% on a 30-year FRM, cash equal to 2.5% of the loan amount will fund a 2-1 buydown, where the payment is calculated in year one at 5% and in year 2 at 6%. This would reduce the expense ratio in year one by about 4 1/2 percentage points. It is relatively easy for lenders to overcharge for temporary buydowns, and some do so. Read What Is a Temporary Buydown? Getting Third Parties to Contribute: Borrowers sometimes can obtain the additional cash required to reduce their expense ratios from family members, friends, and employers, but the most frequent contributors in the US are home sellers including builders. If the borrower is willing to pay the seller's price but cannot qualify, the cost to the seller of paying the points or the buydown escrow the buyer needs to qualify may be less than the price reduction that would otherwise be needed to make the house saleable. Read Are House Seller Contributions Kosher?

Income Is Not Necessarily Immutable: While borrowers can't change their current income, there may be circumstances where they can change the income that the lender uses to qualify them for the loan. Lenders count only income which can be expected to continue, and they therefore tend to disregard overtime, bonuses and the like. The burden of proof is on the applicant to demonstrate that these other sources of income can indeed be expected to continue. The best way to do this is to show that they have in fact persisted over a considerable period in the past. Borrowers who intend to share their house with another party can also consider the feasibility of making that party a co-borrower. In such case, the income used in the qualification process would include that of the co-borrower. The co-borrowers credit should be as good as that of the borrower, however, because lenders use the lower of the credit scores of co-borrowers. This works best when the relationship between the borrower and the co-borrower is permanent.