May 11, 2021

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Preparing Your Finances For An FHA Mortgage: Debt

Is your credit ready for an FHA loan?

The debt-to-income ratio is a calculation that your lender will use to determine the amount of your monthly financial obligations compared to the amount of income you have. The debt-to-income ratio is an important tool for the lender.

The more income you have compared to outgoing payments every month the better, your lender needs to justify you as a good credit risk. So how do borrowers with a lot of debt deal with this problem?

This is an important factor because if the ratio is too high yor lender can’t justify the loan. Borrowers should learn what the FHA considers to be “debt” and what things are not automatically counted as part of your debt ratio in order to view their finances the way the lender will.

FHA Home Loans And Debt Ratios

Some debt isn’t counted as such for the purpose of calculating the debt-to-income ratio under the rules found in HUD 4000.1. What financial obligations are not counted?

According to HUD 4000.1, the FHA Lender’s Handbook for the FHA Single Family Home Loan program, the following is not counted as debt:

  • 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 and other retirement, 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

Excluding the above, the lender is required in HUD 4000.1 to “review all credit report inquiries to ensure that all debts, including any new debt payments resulting from material inquiries listed on the credit report, are used to calculate the debt ratios.”

One reason this is required is unrelated to the debt calculation–your loan officer must “determine that any recent debts were not incurred to obtain any part of the Borrower’s required funds to close on the Property being purchased.”

On Student Loans

Are you a potential home loan borrower carrying large student loan debt? Do you worry that will interfere with loan approval?

One thing you can do to address this is to make sure you are not delinquent on ANY student loans and that your record of payments is consistent for at least 12 months. Some may wish to explore student loan consolidation options ahead of a new home loan to see if that can help.

Talk to a loan officer while you are in the planning stages of your home loan to learn what the lender thinks might help you specifically based on your finances, goals, etc.

You can also call the FHA directly at their toll-free number (1-800 CALL FHA) to request a referral to a local, HUD-approved housing counselor who can give advice on financially preparing for the home loan.

Joe Wallace - Staff Writer

By Joe Wallace

March 23, 2021

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 for (8) years and is currently the Associate Editor for

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About was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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