Debt to Income Ratios for FHA Loans
Qualifications for an FHA loan also take into consideration the borrower and co-borrower’s debt-to-income (DTI) ratio. There are specific requirements with regards to debt-to-income-ratios to help protect the buyer from being approved for a loan they cannot truly afford. If you recall the real estate bubble we endured around 2006 – 2008, much of the result of that was accredited to lenders funding loans that buyers genuinely did not qualify for. In today’s mortgage lending environment, there are checks and balances in place to avoid this from happening again.
The debt ratio paints a clear picture of whether borrowers are in a financial position to purchase a home and the associated living costs that comes with it. The debt-to-income ratio is an FHA loan requirement that takes these two factors into consideration. The first ratio is the mortgage payment expense compared to the effective income. With this ratio you take the proposed mortgage monthly payment and divide it by the buyer’s gross income. The second ratio is the total of all debts, installment and revolving accounts, combined with the proposed housing payment versus the borrower’s effective income. For this equation take your monthly mortgage payment, add all your debts and divide it by the gross monthly income. Every lender uses different criteria in qualifying borrowers based on debt-to-income ratios. The FHA guideline for back-end ratio is at 50%, some lenders can go as high as 55%. AMCAP Mortgage offers back-end ratio requirement of up to 57% with compensating factors. This allows a borrower to purchase a slightly higher priced home.
Specific guidelines and requirements can be obtained by contacting our FHA Home Loan Specialist at 281-860-2533.