November 10, 2017
What is the debt-to- income ratio (DTI) for an FHA loan? We answered that question in a previous blog post, discussing the FHA loan rules for loan approval where loan affordability is concerned.
In general, FICO scores and debt ratios are reviewed together. You may have a debt ratio that comes close to or exceeds the general standard for these limits, but compensating factors may apply to help the lender justify approving your home loan. What are these factors?
FHA Loan Compensating Factors For Higher Debt-To-Income Ratios
FICO scores play an important part in determining who must have compensating factors for a high DTI. As the FHA loan handbook states, borrowers who meet the FHA loan FICO score requirement for maximum financing (580 or above) can have a debt to income ratio of 31% / 43%.
The first number is your DTI without the mortgage payment factored in, the second number is the percentage of your income taken up by your monthly financial obligations including the projected monthly mortgage bill. There are certain financial obligations the lender will not consider as “debt” so it’s important to discuss such obligations with your lender to see what may apply.
FICO Scores Factor Into Your DTI Requirements If You Exceed The Minimum
According to HUD 4000.1, if you do not qualify for maximum financing, your DTI cannot exceed the 31/43 ratio. Lender standards may also apply.
Debt To Income Ratio Compensating Factors
Depending on how much you exceed the DTI limits, the compensating factors you need may vary. In some cases it may be a case of having additional cash reserves. Residual income may also help. If your DTI is in a range at 40/40, FHA loan rules require the borrower to have “no discretionary debt”.
For applicants with FICO scores 580 or higher who have a DTI at 40/50, residual income, cash reserves, “significant additional income” and other requirements may apply.
Again, these compensating factors are for those who have FICO scores at 580 or higher. Additional lender standard (including FICO score requirements) may also apply.
The information presented here applies, according to HUD 4000.1, to manually underwritten mortgages. You may find lender standards and other factors affect such calculations, and if you aren’t sure how your debt ratio or FICO scores will affect your chances for FHA loan approval, it’s good to speak to a loan officer to discuss your individual circumstances.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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