Loan Requirements

FHA Debt-to-Income Ratio Requirement

Qualifications for an FHA loan also take into consideration the borrower and the co-borrower’s debt-to-income (DTI) ratio. There are specific requirements with regard 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.

What is DTI ratio?

The debt-to-income (DTI) ratio allows lenders to measure borrowers’ ability to manage monthly payments and repay debts. The debt ratio paints a clear picture of whether borrowers are financially able to purchase a home and the associated living costs that come with it. The debt-to-income ratio is an FHA loan requirement that considers these two factors.

Front-End ratio

The front-end DTI ratio is the mortgage payment expense compared to the effective income. You divide the proposed mortgage monthly payment with this ratio by the buyer’s gross income.

Back-End ratio

The front-end DTI ratio is the mortgage payment expense compared to the effective income. You divide the proposed mortgage monthly payment with this ratio by the buyer’s gross income.

FHA DTI Limits

The current debt-to-income ratio for an FHA loan is 36/45, meaning the borrower’s income cannot exceed 36% of their gross income for housing-related debt. The maximum ratio should be 45% of the borrower’s gross income for the total debt, including the proposed housing expense. However, the back-end ratio can be as high as 50% for some borrowers, especially those with excellent credit. The back-end ratio can go higher than 55% with “compensating factors.” Some lenders may even go as high as 57% ratio if several compensating factors may help the lender decide to extend the loan or not.

Every lender uses different criteria in qualifying borrowers based on debt-to-income ratios. The FHA guideline for the back-end ratio is 456%; some lenders can go as high as 55%. We offer FHA home loans with a back-end ratio requirement of up to 57% with compensating factors. This allows a borrower to purchase a slightly higher-priced home.

FHA Compensating Factors

Credit, Income, and Assets constitute a mortgage loan; all three must be present. If one of these factors is below par, the other two may compensate for the lack thereof. Several factors may compensate when one aspect is lacking. Generally, if a borrower’s credit score is at 580 and the file is not getting approval from the Automated Underwriting System (AUS), a higher down payment or lower loan-to-value (LTV) may help. Conversely, having an additional income, thus, lowering your DTI, may help generate an automated approval. In short, a higher down payment or a lower DTI ratio may compensate for the lack of credit.

Specific guidelines and requirements can be obtained by contacting our FHA Home Loan Specialist at (281) 801-6965.