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We were pre-qualified for an FHA loan, after our loan processor reviewed our taxes

She came across the 2106 forms and said that this had increased our debt to ratio, she gave us two options to proceed, either run our scores and hope they have increased to over 640 or pay all our existing debt (which isn't much, $4600) and close accounts in order to bring our debt to ratio under 45%, she was going to send it structured to underwriting that all debt would be paid by closing and accounts will be closed....what are the chances that this will fly with underwriting and our loan gets approved?
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August 11 2013 - Peoria
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Sounds like you're falling into the FHA 620-639 program. It's unfortunate that your tax returns were reviewed so late in the process and not addressed by the loan officer upfront.

The 45% max DTI is not an FHA guideline for this program, it's typically an investor overlay because it is a riskier program. Do you happen to know what you DTI is with the 2106 expenses and not paying off your current debt? If it is under 50% your lender may be able to get you an exception if you have over compensating factors (reserves, no derogatory credit in the past 12 months, etc.)

If it is not a problem to pay off the debt and your ratio is under 45% there shouldn't be an issue with getting the approval, but it may be possible to avoid having to spend the money right now.

Jake
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August 11 2013
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@Academy Mortgage: Our DTI with 2106 expenses and debt is 49%, paying off the current debt would bring it under 45% @GMerino: our credit scores were 636 and 620
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August 11 2013
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@ GMerino: yes, paying our debt is an option we fortunately do have, our loan officer advised that she would get the underwriting approval with it structured that way, she stared UW will condition us to 'close' the accounts prior to us paying it off,, but the actual paying off of the loans could be done the day of closing. We thought about the effect that would have on our credit score, but we figured by closing, it would not be an issue at that point. Are we wrong in believing that?
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August 11 2013

Understood, so what are your current credit scores?  It sounds like a bank overlay that if you have a credit score between 620 - 639 you debt to income ratios must be below 45%? 

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August 11 2013
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I did...her answer was "I feel confident that it would work just fine." I was just wondering if others have experienced this and what the outcome was? Thanks for your input!
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August 11 2013

Agree, with wetdawgs, that this question should be asked to your loan officer, unless he/she does not know how to look tax returns for self employment.  I know very loan processors that really know what they are doing.

Is it an option for you to pay off all of your debt.  Closing your accounts could affect your credit score, make sure you are able to close your loan prior to doing this.

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August 11 2013
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This is a great question to ask your lender directly.  "What are the chances?".     Hopefully your lender explained why the 2106 had such an impact. 

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August 11 2013
 
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We were pre-qualified for an FHA loan, after our loan processor reviewed our taxes
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August 11 2013 | 7 answers
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