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? ›
According to the FHA official site, "The FHA allows you to use 31% of your income towards housing costs and 43% towards housing expenses and other long-term debt." Those percentages should be examined side-by-side with the debt-to-income requirements of a conventional home loan.
Can you get an FHA loan with bad debt? ›
You will still need to meet the lender's other credit, financial, and income requirements to be approved. You can still apply for an FHA loan after Chapter 7 bankruptcy if more than one, but less than two years have passed, although you will need to meet additional requirements.
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.
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 FICO requirements for FHA loans? ›
FHA Loan applicants must have a minimum FICO® score of 580 to qualify for the low down payment advantage which is currently at 3.5%. If your credit score is below 580, the down payment requirement is 10%. You can see why it's important that your credit history is in good standing.
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.
Is it hard to get approved for an FHA loan? ›
While conventional mortgages usually require a credit score of 620 or more, FHA loans are open to borrowers with credit scores as low as 500. You don't need a big down payment. If your credit score is 580 or more, you could qualify to put down just 3.5%. Interest rates are competitive.
What is the downside to an FHA loan? ›
FHA loans require borrowers to pay mortgage insurance premiums (MIPs) at closing and throughout the life of the loan. Specifically, you'll pay 1.75% of the loan amount at closing as your upfront MIP. Then, you'll pay MIPs of 0.15% to 0.75% of the loan amount every year.
What are the 4 C's of FHA underwriting? ›
Lenders consider four criteria, also known as the 4 C's: Capacity, Capital, Credit, and Collateral. What is your ability to pay back your mortgage? Factors that play into your Capacity include current income, employment history, and liabilities, such as other loans and financial obligations.
The FHA recommends a DTI ratio of 43%. In addition, the gross mortgage payment should not exceed 31% of your income. To help you qualify for an FHA loan, lenders may consider other compensating factors, such as large cash reserves or future income potential.
What is the highest DTI for FHA? ›
Borrowers must have a minimum credit score of 580 to qualify for the loan. The maximum DTI for FHA loans is 57%. However, a lender can set their own requirement. This means some lenders may stick to the maximum DTI of 57%, while others may set the limit closer to 40%.
What is the FHA 75% rule? ›
If you're currently in the market looking to buy a triplex or fourplex with FHA financing, you need to see if the property's rents pass the Self-Sufficiency Test. To be “self-sufficient” means that 75% of the property's rents need to cover the monthly payments.
Are FHA loans always 3.5% down? ›
FHA loans require a minimum 3.5 percent down payment for borrowers with a credit score of 580 or more. Borrowers with a credit score of 500 to 579 need to put 10 percent down to get an FHA loan. Conventional conforming mortgages only require 3 percent down, and VA and USDA loans require no down payment.
What is the 2 FHA loan rule? ›
A second FHA loan may be allowable for homebuyers who meet these qualifying criteria: You're relocating for a new job and need a new primary residence. The new home is more than 100 miles away from your current FHA-financed home. You're getting a divorce and you intend to purchase a new home in your name only.
What are the rules for paying off debt to qualify for FHA? ›
The FHA does not require collections to be paid off entirely in order for a borrower to be approved. However, they do recognize that collections can impact a borrower's ability to repay their loan, which is something they take into consideration.
What are qualifying debt ratios? ›
As a general guideline, 43% is the highest DTI ratio a borrower can have and still get qualified for a mortgage. Ideally, lenders prefer a debt-to-income ratio lower than 36%, with no more than 28%–35% of that debt going toward servicing a mortgage.
What is the debt-to-income ratio for a QM loan? ›
One category of QMs is the General QM category. For General QMs, the ratio of the consumer's total monthly debt to total monthly income (DTI or DTI ratio) must not exceed 43 percent.
What are the two qualifying ratios used for fha mortgage loans and what are their standard qualifying thresholds? ›
FHA lenders use two qualifying ratios for loan applicants. FHA requirements currently allow up to 31% for the housing expense ratio (HER) and up to 43% for the total obligations ratio (TOR). The home must be appraised by an FHA-approved appraiser.
