When it comes to qualifying for a home loan, there are a lot of guidelines and a ton of math. One such mortgage calculation includes dividing the amount of monthly debt payments by the gross monthly income. However, not all home loans treat this area equally. Plus, many lenders even treat the same loan program differently. When it comes to FHA debt to income ratio (DTI), there is a lot of flexibility for borrowers. Actually FHA DTI limits could exceed 55% and even approach 50% for FHA manually underwritten loans. So, choosing the right FHA lender that understands FHA guidelines and the math could help improve chances of loan approval.
What Debts Must Be Included in FHA Debt to Income Ratio?
Actually, just about every debt payment must be included in the FHA DTI calculation. These include the following, but may include others.
- Credit card or lines of credit payments
- Auto loan payments
- Student loan payments – Learn FHA student loan payment requirements
- Other installment loans or leases
- Mortgage payments
- Taxes, insurance, and association dues on free and clear properties (including land)
- IRS and state income tax payment plans
- Alimony and child support
- Payment for the proposed new mortgage
Occasionally, debts pop up that do not report on the credit bureaus. These must be disclosed and counted as well. For instance, someone may say, “That is just a buy here pay here car loan that does not show on my credit report.” However, that is a debt and must be counted.
FYI, FHA does not count loan payments against retirement funds in the FHA debt to income calculation. Therefor, borrowing against a 401k for down payment or other means does not hurt qualification, except it does lower the asset. Always consult your adviser before borrowing against a retirement account.
How to Calculate Debt to Income Ratio for an FHA Loan
Once the debts are determined and the income calculated, lenders just divide the two figures.
Housing debt to income ratio calculation:
Total housing payment plus any HOA dues / calculated income
$1000 house payment / $5000 income = 20% housing ratio
Total debt to income ratio calculation:
Total housing payment, HOA dues, and other debts / calculated income
($1000 house payment + HOA dues + $1000 other debts) / $5000 income = 40% total ratio
These figures are then used in one of the automated systems or through a manual underwrite.
FHA Debt to Income Ratio for Manual Underwriting
Mortgage lenders run loans through an automated underwriting system (AUS). The two most popular are the Fannie Mae Desktop Underwriter and Freddie Mac Loan Advisor. But, not all loans get an automated approval. Although, that does not mean an automatic loan denial. Actually, there is another way of getting an FHA loan approval through manual underwriting guidelines. These FHA guidelines are more strict, yet still have lots of opportunity for loan approval.
The standard manual FHA debt to income ratio limit is 43%. This means the total monthly debt payments may not exceed 43% of the calculated income. Additionally, the housing ratio may not exceed 31%. FHA housing ratio includes the principal, interest, PMI, taxes, insurances, and HOA dues. Although, both percentages may be exceeded at times.
FHA Manual DTI Exceptions
Even though 31/41% are the FHA DTI limits, compensating factors could allow a higher figure. Many do not realize this, but FHA manual guidelines allow up to a 40% housing ratio and 50% total debt to income ratio. Because of this little known exception, many borrowers may not get their fair shot at home ownership. So, how can a borrower get an FHA debt to income ratio exception?
FHA Compensating Factor Examples
- Energy efficient homes
- Documented asset reserves
- Minimal increase in housing payment
- High residual income
- Significant additional income not included in effective income
Depending on the borrower’s credit score, one, two, or more of these traits could allow up to a 40/50% debt ratio!
So whether looking to purchase, build, or refinance, reach out to us today to see if an FHA loan is right for you.