What is considered a red flag in the mortgage underwriting process?

A high debt-to-income (DTI) ratio is seen as a significant red flag in the mortgage underwriting process because it indicates that a borrower may have limited capacity to take on additional debt. The DTI ratio is calculated by dividing a borrower’s monthly debt payments by their gross monthly income. Lenders typically have thresholds for acceptable DTI ratios; if a borrower's ratio exceeds these limits, it suggests they may struggle to make mortgage payments alongside existing obligations.

In essence, a high DTI can signal financial strain, making it risky for lenders to approve the loan. This concern can lead to potential default, making it a critical factor during underwriting assessments. On the other hand, consistent income over five years, two years of credit history, and a stable employment history exhibit positive financial habits and reliability, which would generally not be flags indicating risk in the underwriting process.