Debt-to-Income Ratios
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.
FHA Loan Articles
September 13, 2023FHA rehab loans are a specialized type of mortgage loan offered by the Federal Housing Administration that allows borrowers to finance both the purchase or refinance of a home and the cost of needed repairs.
September 8, 2023Borrowers considering an FHA loan should be familiar with some basic loan terminology. These loans are popular among first-time homebuyers and those with lower credit scores because they often offer more flexible eligibility requirements and lower down payment options.
September 2, 2023You may have heard the terms co-borrower and cosigner in connection with your FHA loan process, but aren't sure about the distinction. Both a co-borrower and a cosigner can help a primary borrower qualify for a mortgage, but they have different roles and responsibilities.
August 27, 2023The Federal Housing Administration has specific credit requirements and guidelines for borrowers looking to buy or refinance homes with an FHA loan. In addition to what FHA guidelines state, lenders may have more stringent requirements that may vary from one lender to another.
August 23, 2023Mortgage APR (Annual Percentage Rate) and a loan's interest rate are two different things, although they are closely related. Understanding the difference is an important part of a borrower's analysis of the true cost of their mortgage.
August 19, 2023FHA refinance loans allow homeowners with existing FHA loans to refinance their mortgages. These loans are designed to help borrowers take advantage of lower interest rates, reduce their monthly mortgage payments, or access equity in their homes for various purposes.
