December 6, 2011
In a previous blog post, we mentioned the importance of the debt to income ratio as part of the FHA loan application process.
Calculating the debt to income ratio for the purpose of underwriting an FHA mortgage loan includes adding up the entire monthly mortgage obligation (principal and interest, escrow for taxes, hazard insurance, mortgage insurance premium, and any homeowners’ association dues) and reviewing all revolving and installment debt due per month.
These can include personal and automobile loans, student loans, credit card debt and more. These amounts are combined and divided by the borrower’s verified gross monthly income.
FHA rules say the maximum ratio to qualify is 41%. But when calculating that debt to income percentage, the FHA requires lenders to examine not only current financial obligations but also projected debts as well.
According to HUD 4155.1, participating FHA lenders are instructed, “Debt payments such as a student loan or balloon note scheduled to begin or come due within 12 months of the mortgage loan closing must be included by the lender as anticipated monthly obligations during the underwriting analysis.”
That’s an important thing to keep in mind when planning your personal finances in anticipation of getting an FHA mortgage. Some borrowers try to pay off credit cards and other recurring debt prior to applying for an FHA mortgage–the less you are obligated to pay each month, the better your chances for an FHA home loan are (assuming all other qualifying factors are met, naturally).
The FHA offers an exception to the “projected debt rule” especially for those who are trying to pay off credit cards, revolving credit accounts and possible anticipated debt as it applies here. According to the FHA and HUD, “Debt payments do not have to be classified as projected obligations if the borrower provides written evidence that the debt will be deferred to a period outside the 12-month timeframe.”
That’s definitely something to keep in mind when planning your financial future and for the FHA loan application.
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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