December 27, 2013
When a borrower applies for an FHA home loan, he or she is asked to list all source of verifiable income. This is used to calculate the debt-to-income ratio, which is a comparison of the borrower’s income against the amount of financial obligations the applicant must pay every month.
The ratio is very important in the FHA loan approval process. According to HUD 4155.1, Chapter Four, Section F, this ratio must be calculated in two ways–the borrower’s income is compared to the projected amount of the FHA mortgage payment, and a separate calculation is made for the total amount of monthly debts plus the mortgage payment. Why are these calculations made?
Because FHA loan rules don’t allow the mortgage payment itself or the amount of total debt plus the mortgage payment to exceed a certain percentage of the borrower’s verifiable income. According to Chapter Four, “The relationship of the mortgage payment to income is considered acceptable if the total mortgage payment does not exceed 31% of the gross effective income.”
When it comes to the calculation of the mortgage alone versus the borrower’s total effective income, “A ratio exceeding 31% may be acceptable only if significant compensating factors, as discussed in HUD 4155.1 4.F.3, are documented and recorded on Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. For those borrowers who qualify under FHA’s Energy Efficient Homes (EEH), the ratio is set at 33%.”
FHA loan rules say this calculation is made to include both principal and interest, plus escrow deposits for real estate taxes and any required hazard insurance. A list of other expenses may also be factored in, including:
• mortgage insurance premium
• homeowners’ association dues
• ground rent
• special assessments, and
• payments for any acceptable secondary financing.
When it comes to the total amount of the borrower’s debt plus the mortgage payment, FHA loan rules in Chapter Four state:
“The relationship of total obligations to income is considered acceptable if the total mortgage payment and all recurring monthly obligations do not exceed 43% of the gross effective income. A ratio exceeding 43% may be acceptable only if significant compensating factors, as discussed in HUD 4155.1 4.F.3, are documented and recorded on Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. For those borrowers who qualify under FHA’s EEH, the ratio is set at 45%.”
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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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