August 19, 2015
We write a great deal about what it takes to qualify for an FHA loan–income verification, FICO scores, employment history, sources of down payment funds, etc. But there’s a very important part of the FHA loan application data you submit that the lender will review to insure you can actually afford your new loan.
Borrowers are required to submit their income and employment data to the lender; the lender is required to do calculations based on that data to see what your debt to income ratio is–the amount of money you have coming in from verifiable sources versus the amount you have going out in monthly financial obligations.
If your debt to income ratio is too high, you may have trouble qualifying for an FHA mortgage. But what is the FHA loan requirement for debt-to-income?
The rules for this area are found in HUD 4155.1 Chapter Four at the time of this writing. At some point a new FHA loan guidebook will be finalized that includes these rules and more, but for now Chapter Four is our guide. It states in part that there are two basic calculations the lender must make.
One adds up the “relationship of total obligations to income”. The borrower’s ratio in this area is acceptable, “if the total mortgage payment and all recurring monthly obligations do not exceed 43% of the gross effective income.”
An amount in excess of 43% could be considerable to the lender but only if there are what the FHA terms “significant compensating factors”. Also, there is a slightly higher debt to income ratio permitted for borrowers who qualify under the FHA Energy Efficient Homes program–45% is the limit in those cases.
There’s a second calculation. The lender must also determine whether the borrower’s total debt AND the amount of the new mortgage loan together are reasonably affordable. According to Chapter Four:
“The relationship of the mortgage payment to income is considered acceptable if the total mortgage payment does not exceed 31% of the gross effective income. A ratio exceeding 31% may be acceptable only if significant compensating factors, as discussed in HUD 4155.1 4.F.3, are documented and recorded on Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary”. And again, borrowers who qualify under the FHA Energy Efficient Homes program do have a slightly higher ratio–the limit in these cases is 33%.”
Ask your loan officer about the FHA Energy Efficient Homes program to learn more about how it works and why it affects your debt to income ratio.
These are the basic calculations the lender must make. Lender standards may also factor in to the equation and borrowers should ask questions of their loan officer to determine what standards above and beyond FHA loan minimums may apply in a given transaction. We’ll discuss additional debt to income ratio factors such as how the lender calculates the total mortgage payment for purposes of figuring out debt-to-income ratios in another blog post.
Do you have questions about FHA home loans? Ask us in the comments section.
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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