October
1
,
2023
When you apply for an FHA mortgage loan, your lender is required to make sure you can afford the loan and your current amount of monthly debt. The loan officer will be required to calculate the amount of your financial obligations, compare it to your current income, and determine of the ratio is within an acceptable range for home loan approval.
Credit qualifications such as FICO scores, credit history, and employment are definitely factors in the home loan approval process, but the amount of debt you carry is equally important. The rules for debt-to-income (DTI) ratios and loan approval are found in the FHA loan handbook, HUD 4000.1.
The rules specifically state that your lender is required to "determine the Borrower’s monthly liabilities by reviewing all debts listed on the credit report, Uniform Residential Loan Application (URLA), and required documentation."
Some borrowers worry about certain forms of debt and how they might affect the DTI; FHA loan rules state that some debt is not included:
"Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower’s gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement."
Borrowers who are authorized account users on someone else's credit card (or other forms of indebtedness) should take note of rules in HUD 4000.1 that address that specific situation:
"Accounts for which the Borrower is an authorized user must be included in a Borrower’s DTI (debt to income) ratio unless the Mortgagee can document that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrower’s DTI."
That is important to remember if you find yourself in a situation where you are asked, prior to your loan application, to be a co-borrower, shared account user, etc. Evaluate how that may or may not affect your DTI and loan approval chances.
Along these lines, FHA loan rules have provisions for other circ*mstances:
"Loans secured against deposited funds, where repayment may be obtained through extinguishing the asset and these funds are not included in calculating the Borrower’s assets, do not require consideration of repayment for qualifying purposes."
In some cases, a borrower wants to pay off a debt before the home loan closes-a good idea if a borrower is worried about how the debt might affect loan approval. In these instances, FHA loan rules require the source of payoff funds must be verified and documented to insure previous debt calculations are still accurate.
"The Mortgagee must document that the funds used to pay off debts prior to closing came from an acceptable source, and the Borrower did not incur new debts that were not included in the DTI ratio."
Talk to your loan officer if you aren’t sure how certain types of debt or the debt you are thinking of paying off before applying might affect your chances for FHA home loan approval.
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FAQs
FHA Debt-to-Income Ratio
The FHA standard for a DTI ratio is 43% or less, and the calculation includes the future mortgage as a debt.
What are the DTI rules for FHA? ›
Understanding Compensating Factors
According to official FHA guidelines, borrowers are generally limited to having debt ratios of 31% on the front end, and 43% on the back end. But the back-end DTI could be as high as 50% for certain borrowers, particularly those with good credit and/or other "compensating factors."
What debt ratio does FHA manual underwrite? ›
The standard manual underwrite FHA ratio is 31/43. The 31% is your front-end ratio also known as your housing ratio and the 43% is when you put all of your monthly debt in and divide by your gross income. If you have a no score or less than a 580 score you cannot go higher than 31/43.
What is the debt exclusion for FHA loans? ›
"Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower's gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement."
What will disqualify you from an FHA loan? ›
The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
Can you get a mortgage with 55% DTI? ›
It's possible to get a mortgage with a 55% DTI, but you'll need to have an otherwise strong application, and you'll likely be limited to government-backed mortgages. For example, FHA loans potentially allow DTIs up to 57%.
Can I get an FHA loan with 50% DTI? ›
FHA loans are known for being more lenient with credit and DTI requirements. With a good credit score (580 or higher), you might qualify for an FHA loan with a DTI ratio of up to 50%. This makes FHA loans a popular choice for borrowers with good credit but high debt-to-income ratios.
Does FHA have a DTI tolerance? ›
Borrowers must have a minimum credit score of 580 to qualify for the loan. The maximum DTI for FHA loans is 57%. However, a lender can set their own requirement. This means some lenders may stick to the maximum DTI of 57%, while others may set the limit closer to 40%.
What ratios must a borrower not exceed to qualify for an FHA loan? ›
FHA debt-to-income (DTI) ratio
To meet the DTI ratio requirements for an FHA loan, your combined monthly debt payments, including your mortgage, shouldn't exceed 43 percent. No more than 31 percent of your income should go toward your mortgage payments.
What are the two ratios used for FHA loans? ›
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after your other monthly debts are paid. For the most part, underwriting for conventional loans needs a qualifying ratio of 33/45. FHA loans are less strict, requiring a 31/43 ratio.
Federal Housing Administration loans: 14.4% denial rate. Jumbo loans: 17.8% denial rate. Conventional conforming loans: 7.6% denial rate. Refinance loans: 24.7% denial rate.
What are the three key ratios lenders look at when underwriting a loan? ›
Summary. Lending ratios exist to conduct credit and financial analysis of potential borrowers before loan origination. They include the debt-to-income ratio, the housing expense ratio, and the loan-to-value ratio.
What is the FHA debt ratio limit? ›
How much can that ratio be? According to the FHA official site, "The FHA allows you to use 31% of your income towards housing costs and 43% towards housing expenses and other long-term debt." Those percentages should be examined side-by-side with the debt-to-income requirements of a conventional home loan.
What is the FHA 75% rule? ›
If you're currently in the market looking to buy a triplex or fourplex with FHA financing, you need to see if the property's rents pass the Self-Sufficiency Test. To be “self-sufficient” means that 75% of the property's rents need to cover the monthly payments.
What is the maximum DTI for FHA loans 2024? ›
FHA guidelines call for borrowers to have a DTI ratio of 43% or less. They also indicate that a mortgage payment should not exceed 31% of a person's gross effective income. However, as with credit scores, lenders have some discretion here.
What is a qualifying debt-to-income ratio? ›
Debt-to-income (DTI) ratio measures the percentage of a person's monthly income that goes to debt payments. A DTI of 43% is typically the highest ratio that a borrower can have and still get qualified for a mortgage, but lenders generally seek ratios of no more than 36%.
What is the maximum DTI for a mortgage? ›
Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.
What are the two mortgage qualifying ratios? ›
Lenders normally use one of two qualification ratios in their underwriting process. The first is the monthly debt-to-income ratio (DTI) while the second one is called the back-end ratio, which calculates the monthly debt payment to income.
Can you pay down debt to qualify for a FHA loan? ›
FHA and VA mortgage guidelines will allow a borrower to pay down their credit card balances to $0 and the underwriter will only count a $10/month minimum payment towards the borrower's debt to income (DTI) ratio. The credit card account do not need to be paid. This is definitely good news for FHA and VA loans.
