Quantcast

Did You Know?

Debt-to-income ratio shows total debt as a percentage of total assets. Lower debt-ratios improve the chances of getting a mortgage.

FHALoan.com
Click to Start Your Refinance or Purchase Loan

Debt-to-Income Ratios

Debt-to-Income Ratio

If FHA borrowers start to default on their homes, it defeats the main purpose of the FHA. That's why there are certain criteria in place to ensure that homebuyers are not signing up for home loans that they cannot reasonably afford and pay back. Since the FHA has no minimum income requirement, it relies on the borrowers' debt-to-income ratio to determine whether they have the means to make monthly payments.

What Are Debt Ratios?

Your debt-to-income ratio (also called a debt ratio) gives lenders a clear picture of how much you owe each month to how much you earn. The debt ratio is calculated by dividing the sum of your monthly debts and dividing it by your total assets.

For your monthly debt, the FHA take into account all the money you owe: credit card or lines of credit payments, car payments, student loan payments, taxes, insurance, alimony and child support, as well as the amount of your potential new house payment. Your pre-tax income, wages, tips, child support, social security, amounts to your total monthly assets. The number you arrive at after dividing your total debt by assets is your debt-to-income ratio.

The FHA's Debt Ratio Limits

According to HUD Handbook 4000.1, FHA borrowers can have a “maximum qualifying ratio” 43%. Add up the total mortgage payment for your potential new home (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.) as well as your recurring monthly debt (car loans, personal loans, student loans, credit cards, etc.). Then divide that amount by your gross monthly income. That number should fall under 43% to qualify.

Many borrowers may have a high enough credit score to qualify for FHA loans and be able to make the down payment as well. But your debt-to-income ratio plays a big role in a lender determining whether you should be granted a loan. A good credit report is important, and it shows lenders that you have a history of making payments on time. But a debt ratio that's too high tells them that you have high monthly expenses compared to how much money you earn and that you might not be the best at budgeting.

The FHA makes some discretionary exceptions for borrowers with debt ratios higher than 43% based on certain “compensating factors.” Borrowers who have higher credit scores, verified cash reserves, or Energy Efficient homes might be granted a loan despite higher debt-to-income ratios.

Learn 
About the One-Time Close Constuction Loan
The debt ratio is a number that compares your monthly expenses to your monthly income. It is calculated by dividing your monthly debts by your total assets.
See Your Credit Scores From All 3 Bureaus
See Your Credit Scores From All 3 Bureaus
GET YOUR SCORES NOW!

FHA Loan Articles

What Kind of Home Loan Works for Me?

Once you’ve decided that you’ll be purchasing a home, one of the first questions you need to ask yourself is what kind of mortgage you’ll be using to finance it. When it comes to shopping for a home loan, there are a number of options to consider.

Everything You Should Know About Appraising for a Refinance

Savvy homeowners make it a point to monitor interest rates so they can take advantage of a drop. Many choose to refinance their mortgages to capitalize on falling rates and lower their monthly payments and save on interest.

Down Payments for FHA Loans

One of the major hurdles that keeps families from purchasing a home is the need for a down payment.  The FHA’s goal is to offer more homebuying opportunities to low- and moderate-income Americans and set more easily achievable down payment requirements for borrowers. 

When Should I Get Approved for a Home Loan?

One of the first steps to take when you decide to buy a home is getting pre-approved for a mortgage. It is important to know what it means to get pre-approved for a home loan, and what the pre-approval letter does and doesn’t do for your home buying chances.

What Affects a Home Loan Applicant's Credit the Most?

A home loan is one of the most important investments you can make. Buying a home means owning property, and being a homeowner means there's potential to watch your investment grow in value over time.  But first, the lender has to make sure the borrower is a good credit risk.

When Buying with an FHA Loan, Don't Skip the Home Inspection

This wait isn’t easy when you've been shopping for a new home. But getting a home inspection is a crucial step, and not one you should consider skipping. Make sure you hire a reliable home inspector, wait for your inspection report, and watch out for these red flags. 


-- Find More Articles in the FHALoan Library --

FHALoan.com is not a government agency. We do not offer or have any affiliation with loan modification, foreclosure prevention, payday loan, or short term loan services. Neither FHALoan.com nor its advertisers charge a fee or require anything other than a submission of qualifying information for comparison shopping ads. We do not ask users to surrender or transfer title. We do not ask users to bypass their lender. We encourage users to contact their lawyers, credit counselors, lenders, and housing counselors.

SecureRights Advertiser Contact Information