November 10, 2017
What is the debt-to- income ratio for an FHA loan? Simply put, it’s the amount of income you have compared to the amount of money you must pay each month on your financial obligations. The debt-to-income ratio (DTI) is an important part of the lender’s calculations that determine whether or not you will be approved for the mortgage loan.
Debt-To-Income Ratio Calculations For FHA Loans
There are two kinds of debt-to-income ratio calculations. One is made with the borrower’s current income and debts, the other is made with those factors plus the amount of the projected monthly mortgage payment.
If you aren’t sure whether you can afford a mortgage loan or not, the second ration will tell you what percentage of your pay will be taken up by your monthly payments including the home loan-a very useful thing to know.
Calculating The Debt Ratio
The lender will basically include all debts unless there are areas where exceptions apply. The FHA loan rulebook, HUD 4000.1, includes a list of things that are not generally included in the DTI. According to HUD 4000.1, the following is not counted in your debt ratio:
-medical collections
-federal, state, and local taxes, if not delinquent and no payments are required
-automatic deductions from savings, when not associated with another type of obligation
-Federal Insurance Contributions Act (FICA) and other retirement contributions, such as 401(k) accounts
-collateralized loans secured by depository accounts
-utilities
-child care
-commuting costs
-union dues
-insurance, other than property insurance
-open accounts with zero balances
-voluntary deductions, when not associated with another type of obligation
These things may place a financial obligation on the borrower but the lender’s calculations (based on FHA loan standards) would not include them. Lender standards and state law may apply.
Acceptable Debt-To-Income Ratios For FHA Mortgage Loans
In general, DTI ratios are affected by FICO scores. Borrowers with lower credit scores and higher debt ratios may find it harder to qualify for an FHA mortgage. Under the rules in HUD 4000.1, borrowers with FICO scores at 580 or above who have debt ratios of 31% / 43% require no compensating factors or additional justification for the mortgage.
The 31% is the figure the lender arrives at before the mortgage obligation is included in the ratio. The 43% is the percentage of income taken up by both the borrower’s current financial obligations plus the amount of the projected mortgage payment each month.
These numbers you see here are based on FHA minimum standards-additional lender standards or requirements may apply. State law or other regulations may also have a say in how these numbers are calculated.
In some cases a borrower may exceed the ratio you see here, but additional compensating factors may be required. This will depend on the borrower’s financial qualifications, how high the debt ratio actually is, etc.
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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