July 3, 2015
Borrowers new to the FHA loan process have lots of questions. One we received recently involves debt-to-income ratios. A reader wanted to know if his credit report, having been newly cleared of a judgment, needed to also be free of other minor debt.
The simple answer is that, no, the FHA loan program does not require a borrower to be completely free from debt in order to apply for a new home loan or refinance loan. But a borrower’s debt to income ratio will be examined to make sure the borrower can afford the loan.
That ratio is very important and is one of the reasons why financial planners and home loan experts recommend examining your finances carefully at least a year before committing to a new home loan.
Reducing your current debt is a big step closer to FHA loan approval. The lender will run two sets of calculations to see if you can reasonably afford the new loan. One calculation is your debt to income ratio as it currently stands. The other is a calculation to see how much the amount of a new mortgage loan might affect that debt-to-income ratio.
If your debt to income ratio is approaching 40%–that is, 40% of your income consumed by your total debt including the amount of a new mortgage–you should work on reducing that ratio as much as possible prior to applying for a new home loan.
Avoid taking out new credit cards or other major lines of credit in the year leading up to your loan application. It’s not just the amount of debt you currently carry–your potential for more debt based on credit limits could also play a part in the decision to approve or deny a home loan. Existing debt and potential debt are important factors to be aware of when doing your financial planning for a new loan
Do you have questions about FHA loans? Ask us in the comments section. All comments are held for moderation before appearing on the site.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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