October
1
,
2023
When you apply for an FHA mortgage loan, your lender is required to make sure you can afford the loan and your current amount of monthly debt. The loan officer will be required to calculate the amount of your financial obligations, compare it to your current income, and determine of the ratio is within an acceptable range for home loan approval.
Credit qualifications such as FICO scores, credit history, and employment are definitely factors in the home loan approval process, but the amount of debt you carry is equally important. The rules for debt-to-income (DTI) ratios and loan approval are found in the FHA loan handbook, HUD 4000.1.
The rules specifically state that your lender is required to "determine the Borrower’s monthly liabilities by reviewing all debts listed on the credit report, Uniform Residential Loan Application (URLA), and required documentation."
Some borrowers worry about certain forms of debt and how they might affect the DTI; FHA loan rules state that some debt is not included:
"Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower’s gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement."
Borrowers who are authorized account users on someone else's credit card (or other forms of indebtedness) should take note of rules in HUD 4000.1 that address that specific situation:
"Accounts for which the Borrower is an authorized user must be included in a Borrower’s DTI (debt to income) ratio unless the Mortgagee can document that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrower’s DTI."
That is important to remember if you find yourself in a situation where you are asked, prior to your loan application, to be a co-borrower, shared account user, etc. Evaluate how that may or may not affect your DTI and loan approval chances.
Along these lines, FHA loan rules have provisions for other circ*mstances:
"Loans secured against deposited funds, where repayment may be obtained through extinguishing the asset and these funds are not included in calculating the Borrower’s assets, do not require consideration of repayment for qualifying purposes."
In some cases, a borrower wants to pay off a debt before the home loan closes-a good idea if a borrower is worried about how the debt might affect loan approval. In these instances, FHA loan rules require the source of payoff funds must be verified and documented to insure previous debt calculations are still accurate.
"The Mortgagee must document that the funds used to pay off debts prior to closing came from an acceptable source, and the Borrower did not incur new debts that were not included in the DTI ratio."
Talk to your loan officer if you aren’t sure how certain types of debt or the debt you are thinking of paying off before applying might affect your chances for FHA home loan approval.
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FAQs
FHA loans are less strict, requiring a 31/43 ratio. For these ratios, the first number is the percentage of your gross monthly income that can go toward housing. This ratio is figured on your total payment, including homeowners' insurance, HOA dues, PMI - everything that constitutes the full payment.
What are the qualifying debt ratios for an FHA loan? ›
There are also debt-to-income (DTI) ratio requirements. DTI measures your monthly earnings against all existing loan payments, including your potential new mortgage. The FHA-recommended limit is a DTI ratio of 43%.
What debt ratio does FHA manual underwrite? ›
FHA RATIOS
The standard manual underwrite FHA ratio is 31/43. The 31% is your front-end ratio also known as your housing ratio and the 43% is when you put all of your monthly debt in and divide by your gross income. If you have a no score or less than a 580 score you cannot go higher than 31/43.
What is the debt exclusion for FHA loans? ›
"Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower's gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement."
Can you get an FHA loan with bad debt? ›
FHA loan: 500 credit score
An FHA mortgage is a government-backed loan guaranteed by the Federal Housing Administration. This is why they're a good option for borrowers with bad credit. You can qualify for an FHA loan with a low credit score of 500 and a 10% down payment, or 3.5% down if your FICO is 580 or above.
Can you get a mortgage with 55% DTI? ›
For FHA and VA loans, the DTI ratio limits are generally higher than those for conventional mortgages. For example, lenders may allow a DTI ratio of up to 55% for an FHA and VA mortgage. However, this can vary depending on the lender and other factors.
What are the two ratios used for FHA loans? ›
Explanation: The two ratios used for FHA loans are 28%/36% and 29%/41%. These ratios are known as debt-to-income ratios and are used by lenders to determine if a borrower is financially qualified for a loan.
What is the FHA 12 month rule? ›
FHA First Mortgage
Borrower must have owned property for 12 months AND if encumbered by a mortgage made payments for the last 12 months within the month due.
What is the front end DTI ratio for FHA? ›
What Is the Ideal Front-End Ratio? Lenders prefer a front-end ratio of no more than 28% for most loans and 31% or less for Federal Housing Administration (FHA) loans and a back-end ratio of no more than 43%. 3 Higher ratios indicate an increased risk of default.
What is the FHA 75 rule? ›
Understanding the Self-Sufficiency Test
This means that the maximum monthly mortgage payment is limited to 75% of the total rental income. This percentage must be at least enough to cover the mortgage payment known as PITI (Principal, Interest, Taxes, and Insurance).
Freddie Mac (Conventional): You can omit these debts on a case by case approval. FHA: You can omit these debts as long as the payment is less than 5% of your monthly income. USDA: Contact a mortgage expert for more info.
What is the FHA total scorecard? ›
TOTAL Scorecard. The FHA TOTAL (Technology Open To Approved Lenders) Mortgage Scorecard is a statistically derived algorithm developed by HUD to evaluate borrower credit history and application information. TOTAL is accessed through an Automated Underwriting System (AUS) and is not an AUS itself.
Does a 401k loan count against debt-to-income ratio FHA? ›
There are other benefits to a 401(k) loan as well. It doesn't count toward your debt-to-income ratio (DTI), and it won't be counted by credit bureaus. So, taking a 401(k) loan won't hurt your credit score and won't affect your odds of qualifying for a mortgage.
What will disqualify you from an FHA loan? ›
The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
What is the manual ratio for FHA? ›
The standard manual underwrite FHA ratio is 31/43. The 31% is your front-end ratio also known as your housing ratio and the 43% is when you put all of your monthly debt in and divide by your gross income. If you have a no score or less than a 580 score you cannot go higher than 31/43.
Why would a home not qualify for an FHA loan? ›
The FHA's three requirements are that a property must be safe, secure, and structurally sound to qualify for one of their loans. Properties cannot have adverse conditions that might imperil the homeowner, and must meet proper building codes. As a buyer, these standards protect you from buying an unsafe property.
What are the rules for paying off debt to qualify for FHA? ›
o Borrowers may not pay down installment debts to less than 10 months to exclude the debt for qualifying. Closed-end debts can be excluded if they will be paid off within 10 months from the date of closing and the cumulative payments of all such debts are less than or equal to 5% of the borrower's gross monthly income.
What are qualifying debt ratios? ›
While each lender has its own specified parameters for loan approval, high-quality lenders generally will require a debt-to-income ratio of approximately 36% or less. Subprime and other alternative-financing lenders may allow for debt-to-income ratios of up to approximately 43%.
What is the maximum DTI for a mortgage? ›
A DTI of 43% is typically the highest ratio that a borrower can have and still get qualified for a mortgage, but lenders generally seek ratios of no more than 36%.
What are the two mortgage qualifying ratios? ›
The front-end ratio is a ratio of the mortgage payment,including insurance, taxes and PMI, if applicable, to the borrower's gross income. The back-end ratio is a ratio of the mortgage payment and other liabilities, such as credit card payments, auto loans and personal loans, to the borrower's gross income.
