FHA Debt To Income Ratio Requirements On Home Purchases

This Article Is About FHA Debt To Income Ratio Requirements On Home Purchases

FHA Debt To Income Ratio Requirements applies for both home purchase, refinance loans, and Cash-Out Refinance Mortgage Loans.

  • Just because borrowers meets all the HUD Agency Mortgage Guidelines on FHA loans does not mean that all lenders will approve borrowers meeting just the minimum agency mortgage guidelines
  • Lenders will require all borrowers meet the minimum HUD agency mortgage guidelines on FHA loans
  • Most Lenders will have Lender Overlays on debt to income ratios, which we will discuss on this blog
  • Lender overlays are additional lending requirements that is above and beyond the minimum HUD Agency Guidelines
  • Lenders are allow to have tougher lending requirements that is above and beyond the minimum HUD Agency Guidelines
  • There are lenders like Gustan Cho Associates with no lender overlays on government and conventional loans
  • Gustan Cho Associates has no lender overlays on FHA loans
  • We just go off the automated underwriting system and have zero lender overlays

What Are Debt To Income Ratio?

What Are Debt To Income Ratio?

Debt To Income Ratio is the ratio of your total monthly debt payments which includes your proposed new housing payment and dividing it by your monthly gross income. Debt to income ratios is how a mortgage lender determines whether or not you  qualify for a particular loan program. Debt to income ratios also determine whether you can afford your new monthly mortgage payments along with all of your other monthly payments under the eyes of the lender. Borrowers should carefully evaluate their monthly debts and see how much house they can afford. When mortgage underwriters are determining debt to income ratios, they do not take into account the borrower’s personal debts that do not report to the credit bureaus. Debts like educational expenses, entertainment, utilities, child care, elderly care, and other personal expenses are not included when a mortgage underwriter is calculating debt to income ratios of a borrower.

Debt to income ratio is one of the most important factors in the mortgage qualification process. Lenders only count qualified income when calculating debt to income ratios. Cash income or other income such as part-time income cannot be counted unless the borrower had at least two year seasoning. No matter how good borrowers credit and credit scores are, they will not qualify for a mortgage if debt to income ratios are higher than the maximum allowed.

How Do Mortgage Underwriters Calculate Borrower’s Debt To Income Ratios

Here Is How Lenders Calculate Your Debt To Income Ratio:

  • Add the total amount of all of borrowers minimum monthly debt payments
  • Calculating proposed monthly principal and interest payments on the loan amount borrowers are applying for
  • Take the annual property taxes of the property and divide this by 12 months
  • Take the annual homeowners insurance and divide it by 12 months
  • Take the sum of the principal, interest, taxes, and homeowners insurance, also referred to as P.I.T.I.
  • Take the P.I.T.I. PLUS the sum of all of the monthly minimum debt payments (add minimum total credit card payments, monthly auto loan payment, minimum student loan payments, and any other minimum monthly payments that are on credit report)
  • Take the proposed P.I.T.I. and the sum of all minimum monthly debt payments together and dividing it by the monthly gross income will yield back end debt to income ratio
  • The front end debt to income ratio is calculated by taking the P.I.T.I. and dividing it by the monthly gross income

The lower debt to income ratio the better it is and less tolerance the mortgage lender has.

What DTI Requirements To Qualify For FHA Loan?

Why Is It That Many FHA Lenders Cap Debt To Income Ratio At 45% DTI?

To get an approve/eligible per Automated Underwriting System, the following debt to income ratio requirements needs to be met:

  • To qualify for a 3.5% down payment FHA loan, a borrower needs to have at least a 580 Credit Score
  • Borrowers with under 580 Credit Scores and down to a 500 FICO can qualify for an FHA Loan per HUD Agency Guidelines
  • However, anyone with under a 580 credit score needs a 10% down payment
  • If the borrower has credit scores under 620 credit scores, the borrower cannot have a debt to income ratio of greater than 43% DTI to get an approve/eligible per automated underwriting system (AUS)
  • There is no front end debt to income ratio requirements per HUD Agency Guidelines if the DTI is capped at 43%
  • However, many lenders may have a front end debt to income ratio requirement of 31% DTI as part of their lender overlays if the borrower’s credit scores are under 620 FICO
  • The front end debt to ratio requirement is not an FHA Guidelines BUT an FHA Lender Overlay imposed by individual mortgage lenders
  • If the borrower has a credit score of at least a 620 credit score or higher, than the maximum front end debt to income ratio is capped at 46.9% and 56.9% DTI back end to get an approve/eligible per automated underwriting system (AUS)
  • The front end debt to income ratio require IS an FHA REQUIREMENT on this case

On FHA Manual Underwriting, borrowers cannot exceed 50% debt to income ratio with two compensating factors.

Why Is It That Many FHA Lenders Cap Debt To Income Ratio At 45% DTI?

The team at Gustan Cho Associates get many inquiries from borrowers who could not qualify on FHA loans with debt to income ratios over 45% DTI. This holds true even though these borrowers have credit scores higher than 620. Why is that the case when FHA allows debt to income ratios to be as high as 46.9% front end and 56.9% DTI back end for borrowers with at least a 620 credit score or higher?

The reason for this is because most lenders have lender overlays. Lenders can have lender overlays on just about everything including debt to income ratios. Lenders do need to meet the minimum HUD Agency Guidelines on FHA loans. However, lenders can have higher lending requirements that are above and beyond the minimum HUD Agency Guidelines. Most lenders do have FHA Lender Overlays On Debt To Income Ratios. Lenders can set higher standards of their own instead of just going by the minimum FHA Guidelines On Debt To Income Ratios.

Case Scenario On Lender Overlays

What is the Lender Overlay Case Scenario

For example, a lender can impose Overlays on debt to income ratios as follows:

  • A lender can impose a 43% DTI debt to income ratios on borrowers with credit scores under 640 credit scores
  • This holds true even though FHA allows debt to income ratios up to 56.9% DTI for borrowers with credit scores of at least 620 or higher
  • Lenders can limit maximum debt to income ratio at a 55% DTI cap although FHA permits DTI up to 56.9% DTI
  • Some lenders will cap DTI at 45% up to a 680 credit score and may cap DTI to 55% over 680 Credit Scores

Again, it is up to a mortgage lender to set their own debt to income ratio requirements and it can be higher requirements than those of FHA. Mortgage Borrowers are looking for a Lender with no FHA Lender Overlays on debt to income ratio can contact us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates has no lender overlays on FHA Loans, VA Loans, USDA, Loans, and Conventional Loans and just go off AUS FINDINGS. We are available 7 days a week, evenings, weekends, and holidays.

1 Comment
  1. William Begane, ESQ

    I have clients who just emerged from Ch 13 bk and are looking to buy in Texas. I have researched FHA eligibility and believe they may be able to qualify through the manual underwriting process. Very good people and impeccable Ch 13 payment history. I chose you because your website has good info on eligibility and you seem to have lots of experience with these types of borrowers. Let me know if you are interested and would like to talk about it. Thanks

    William Begane, ESQ Attorney at Law

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