October 22, 2018
First-time home buyers looking at their FHA mortgage options hear a lot of about the debt-to-income ratio and how it affects the borrower’s ability to get a home loan approved.
But do you know how the FHA lender is supposed to calculate that debt ratio?
The rules governing this are found in the FHA loan handbook, HUD 4000.1. It explains to the lender that there are actually two debt ratio calculations that must be made.
One is the total monthly mortgage payment compared to the total monthly income, the other is the total “fixed payment” compared to the borrower’s income.
These debt ratios are complicated by the requirement that the income used to calculate the ratio must be lender-verified and certain kinds of unverifiable income will not count in the debt ratio unless the lender can verify that income according to FHA loan rules.
Calculating the Debt Ratio For An FHA Mortgage
The mortgage payment compared to the total monthly income calculation should be calculated by adding up the principal and interest, taxes, hazard insurance, mortgage insurance premium, homeowners’ dues, and any other fees associated with your monthly loan payments.
That amount must be divided by the borrower’s gross (not net) monthly income. The maximum ratio to qualify in this area is listed at 31%.
For the calculation of the total fixed payment amount required each month compared to the monthly income amount, the lender must include the amount of the total mortgage payment (as described above) plus all monthly revolving and installment debt which may be in the form of auto loans, store credit cards, student loans, personal loans, and more.
That total amount is divided by the borrower’s gross (not net) monthly income. The maximum ratio to qualify for this calculation is 43%.
Remember that FHA loan rules include minimum standards such as the percentages you see here. But lender standards may be more strict than these minimums as long as the lender applies such standards in accordance with federal law.
If you aren’t sure about how your debt ratios might be calculated or if you need to know if there are higher requirements at a particular lender, talk to a loan officer about your concerns. Your experience may vary depending on the financial institution, state law, and other requirements outside the FHA loan rules.
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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