How is FHA home loan approval affected by your debt ratio? Your credit qualifications including FICO scores and credit history are very important factors in home loan approval, but the amount of debt you carry is also a factor.
Your participating FHA lender must evaluate your monthly debt versus your monthly income to determine if you can realistically afford the mortgage. How does the lender do this?
The rules governing this process are found in the FHA loan handbook, HUD 4000.1. It begins by stating that the lender is required to “determine the Borrower’s monthly liabilities by reviewing all debts listed on the credit report, Uniform Residential Loan Application (URLA), and required documentation”.
The lender must review all monthly financial obligations but some things may not necessarily be included in your debt ratio.
“Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower’s gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement.”
Are you listed as an authorized account user on someone else’s credit card or other debt? That may be factored in even if you don’t use those accounts unless you have proper documentation. According to HUD 4000.1:
“Accounts for which the Borrower is an authorized user must be included in a Borrower’s DTI (debt to income) ratio unless the Mortgagee can document that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrower’s DTI.”
The lender is also instructed, “Loans secured against deposited funds, where repayment may be obtained through extinguishing the asset and these funds are not included in calculating the Borrower’s assets, do not require consideration of repayment for qualifying purposes.”
In some cases, a borrower wants to pay off a debt before the home loan closes. FHA loan rules say this is acceptable but the source of such funds must be verified and documented to insure previous debt calculations are still accurate.
“The Mortgagee must document that the funds used to pay off debts prior to closing came from an acceptable source, and the Borrower did not incur new debts that were not included in the DTI ratio.”