Update On 2016 FHA Guidelines On Debt To Income Ratio

New Update On 2016 FHA Guidelines On Debt To Income Ratio

2016 FHA Guidelines On Debt To Income Ratio were updated on September 14, 2015 with the new revised HUD’s FHA 4000.1 Handbook. The Federal Housing Administration has the most generous debt to income ratio requirements out of all mortgage loan programs. Credit and Income are the two most important factor when it comes to qualifying for a FHA Loan, or any other loan. However, people need to realize that when push comes to shove, income is more important than credit when it comes to qualifying for a mortgage loan. You can have the most perfect credit in this planet, have the best credit scores possible, have substantial assets and large down payment to put down on your home purchase, but if you have little to no documented income, then you will not qualify for a home loan. On the flip side, you can have prior bad credit, open outstanding collection accounts, prior bankruptcy, prior foreclosure, charge off accounts, but as long as you have documented income, you will qualify for a mortgage loan. FHA is extremely generous when it comes to bad credit and low credit scores and collection accounts. You can qualify for a 3.5% down payment home purchase FHA home loan with a credit score as low as 580 FICO. Home buyers with credit scores between 500 FICO and 579 FICO can qualify for FHA Loans as long as they can put a 10% down payment on their home purchase.

2016 FHA Guidelines On Debt To Income Ratio: How Is DTI Calculated

Debt To Income Ratio, also referred to as DTI, is calculated as adding the total sum of all monthly debt payments which includes the new proposed P.I.T.I. ( Principal, Interest, Taxes, Insurance ) and dividing it by the mortgage loan borrower’s monthly gross income. This will yield the back end debt to income ratio. The front end debt to income ratio is the P.I.T.I. divided by the borrower’s or borrowers gross monthly income. Monthly debt payments includes all monthly minimum payments such as minimum credit card payments, auto loan payments, minimum monthly student loan payments, installment loans, written payment agreement payments such as minimum payment agreement payments to the IRS or judgment creditors, child support payments, alimony payments, and any other monthly debt payments. Monthly expenses such as utilities, auto and health insurance, and cellular phone payments are not calculated in the debt to income ratio calculations.

2016 FHA Guidelines On Debt To Income Ratio Caps

FHA will allow up to 56.9% back end maximum back end debt to income ratio cap for FHA mortgage loan borrowers who have a credit score of at least 620 FICO credit score. The maximum front end debt to income ratio cap on FHA mortgage loan borrowers with at least a 620 FICO credit score is 46.9% DTI. These are the ratios required to get an approve/eligible per Automated Underwriting System .  If your credit scores fall below 620 FICO credit scores, the maximum debt to income ratio cap to qualify for a FHA Loan drops to 43% DTI. Those who have higher debt to income ratios and have credit scores below 620 FICO, should consider trying to boost their credit scores so it will go over the 620 FICO credit score mark.

2016 FHA Guidelines On Debt To Income Ratio on manual underwriting depends on underwriter’s discretion and can go over 50% DTI as long as there are compensating factors . Compensating Factors are factors that are favorable to the mortgage loan borrower such as having reserves, larger down payment, additional income the borrower has but is not using to qualify, verification of rent, aged multiple credit tradelines, and other positive factors that the mortgage loan borrower may have.

Debt To Income Calculations On Collection Accounts

2016 FHA Guidelines On Debt To Income Ratio exempts medical collection accounts with outstanding balances and charge off accounts from debt to income calculations. However, this does not hold true with non-medical collection accounts if the borrower has more than $2,000 in total outstanding collections. FHA requires that if the borrower has over $2,000 in outstanding collection accounts that are non-medical, then 5% of the outstanding collection account balance needs to be used in debt to income ratio calculations of the borrower. The borrower does not need to make any payments and FHA does not require the borrower to pay off or make any payment agreement with the creditor and/or collection agency.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

2 Comments

  1. Lisa says:

    Exactly the information I was looking for.
    Current lender advised our dti is not ratioing. When per your post our ratios are fine.

    • Gustan Cho says:

      Lisa,

      Most mortgage lenders have mortgage lender overlays where they may cap debt to income ratios at 43% DTI, 45% DTI, or 50% DTI even though FHA states that the maximum debt to income ratios allowed on FHA borrowers is 56.9% DTI as long as your credit scores are at least 620 FICO credit scores. This is called a FHA mortgage lender overlay on behalf of the mortgage lender. If you are dealing with a lender with overlays on debt to income ratios, no need to worry because I can help you. Please call me at 262-716-8151 or email me at GLCProperties@aol.com and I can help you. I have no lender overlays.

      Gustan Cho
      http://www.gustancho.com
      262-716-8151
      GLCProperties@aol.com