This BLOG On FHA Debt To Income Ratio Requirements On Home Purchases Was UPDATED And PUBLISHED On December 3rd, 2019
FHA Debt To Income Ratio Requirements applies for both FHA home purchase loans as well as FHA refinance loans including FHA Cash-Out Refinance Mortgage Loans.
- Just because an FHA Borrower meets the FHA Debt To Income Ratio Requirements does not mean that all FHA Lenders will honor the minimum HUD Guidelines
- Most Lenders will have Lender Overlays on debt to income ratios, which we will discuss on this blog
In this article, we will cover and discuss FHA Debt To Income Ratio Requirements On Home Purchases.
What Are Debt To Income Ratio?
Debt To Income Ratio is how a mortgage lender determines whether or not you can afford your new monthly mortgage payments along with all of your other monthly payments.
- Debt to income ratio is one of the most important factors in the mortgage qualification process
- 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 those required.
Here Is How Lenders Calculate Your Debt To Income Ratio:
- Adding the total amount of all of borrowers minimum monthly payments
- Calculating proposed monthly principal and interest payments on the loan amount borrowers are applying for
- Then adding the annual property taxes and dividing it by 12 and also adding the annual homeowners insurance and dividing 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 payment (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) and dividing it by 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 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?
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 can qualify for an FHA Loan
- 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
- There is no front end debt to income ratio requirements per FHA but many lenders may have a front end debt to income ratio requirement of 31% DTI
- The front end debt to ratio requirement is not an FHA Guidelines BUT an FHA Lender Overlay imposed by the individual mortgage lender
- If the borrower has a credit score of at least a 620 credit score or higher, than the maximum back end debt to income ratio is capped at 56.9% DTI
- To get an approve/eligible per Automated Underwriting System, the front end debt to income ratio cannot exceed 46.9% DTI
- The front end debt to income ratio require IS an FHA REQUIREMENT on this case
- On FHA Manual Underwriting, borrowers can exceed the 43% debt to income ratio and sometimes exceed 50% debt to income ratio but would need compensating factors
Why Is It That Many FHA Lenders Cap Debt To Income Ratio At 45% DTI?
I get many inquiries from borrowers who could not qualify with debt to income ratios over 45% DTI even though they have credit scores higher than 620. Why is that the case when FHA allows debt to income ratios to be as high as 56.9% DTI for borrowers with at least a 620 credit score or higher?
- The reason for this is because Lenders do not have to abide by FHA Guidelines on debt to income ratios
- Lenders have something called FHA Lender Overlays On Debt To Income Ratios
- They can set higher standards of their own instead of just going by the minimum FHA Guidelines On Debt To Income Ratios
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 faster response. Or email us at email@example.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.