This blog will cover FHA debt-to-income ratio requirements for FHA loans. Just because borrowers meet 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 to meet the minimum HUD agency mortgage guidelines on FHA loans.
Lenders overlays on FHA loans are higher lending requirements than the minimum lending guidelines imposed by HUD. HUD is the parent of FHA. HUD is the giant federal agency insuring FHA loans to private lenders.
Most Lenders will have lender overlays on debt-to-income ratios, which we will discuss in this blog. Lender overlays are additional lending requirements above and beyond the minimum HUD Agency Guidelines. Lenders can have tougher lending requirements above and beyond the minimum HUD Agency Guidelines. Lenders like Gustan Cho Associates have no lender overlays on FHA debt-to-income ratio requirements.
What Are The Steps of The FHA Loan Mortgage Process
All HUD-approved mortgage companies originating, processing, and funding FHA loans need to make sure all of their borrowers meet HUD agency guidelines if they want the FHA loans they originate insured by HUD. If FHA loans lenders originate and fund does not meet HUD agency mortgage guidelines, HUD will not insure the loan. Mortgage loans that do not meet HUD guidelines will not have a place on the secondary market. What this means is these loans cannot be sold.
HUD-approved mortgage lenders originate and fund FHA loans using the funds from their warehouse line of credit. Once the FHA loan is funded, the loan is sold on the secondary market. Once the loan is sold on the secondary market, the funds goes to pay down the warehouse line of credit. This is how lenders repeat the process of making loans over and over again. However, if FHA loans do not meet HUD agency mortgage guidelines, the secondary market will not purchase the loan.
If the loans cannot be sold on the secondary market, the loan becomes a scratch and dent mortgage loan or junk loan. Lenders normally sell scratch and dent loans on the secondary market. This is when lenders lose a lot of money. Due to potential risk of FHA loans becoming a scratch and dent mortgage loan, lenders add lender overlays on FHA loans. In the next paragraph, we will cover lender overlays on FHA loans.
What Are Lenders Overlays on FHA Loans
Gustan Cho Associates has no lender overlays on government and conventional loans. Gustan Cho Associates has no lender overlays on FHA loans. We go off the automated underwriting system and have zero lender overlays.
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 determines whether you can afford your new monthly mortgage payments along with all of your other monthly payments under the eyes of the lender.
How Much House Can You Afford Versus Qualify
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 the debt-to-income ratios of a borrower.
The debt-to-income ratio lenders use may not be reflective on how much house you can afford, Lenders do not take into account utilities, maintenance, repairs, insurance, landscaping, plowing, education, cell phone bills, big ticket appliance repairs, and other costs that can occur with owning a house.
The 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 years of seasoning. No matter how good borrowers’ credit and credit scores are, they will not debt-to-income ratios is higher than the maximum allowed.
How Do Mortgage Underwriters Calculate 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 the credit report)
- Taking 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 the 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 and down to a 500 FICO can qualify for an FHA Loan per HUD Agency Guidelines.
The team at Gustan Cho Associates are experts helping borrowers with credit scores down to 500 FICO. We have zero lender overlays on government and conventional loans. We just follow HUD guidelines on FHA debt-to-income ratio requirements.
Anyone with under a 580 credit score needs a 10% down payment. In general, 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). If the borrower has compensating factors, the AUS can render an approve/eligible with lower credit scores.
FHA Debt-To-Income Ratio Requirements on Credit Scores Under 620 Versus Higher Than 620 FICO
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 HUD Guidelines BUT an FHA lender overlay imposed by individual mortgage lenders.
In many instances, it is not uncommon the automated underwriting system will not exceed debt-to-income ratio greater than a 43% on borrowers with under 620 credit scores.
If the borrower has a credit score of at least a 620 credit score or higher, then 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 in this case. On FHA manual underwrites, borrowers cannot exceed 50% debt-to-income ratio with two compensating factors.
Why Is It That Many Lenders Cap Debt-To-Income Ratio on FHA Loans at 45% DTI?
The team at Gustan Cho Associates gets 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?
Lender overlays on FHA loans are higher lending requirements above and beyond the minimum HUD agency mortgage guidelines by individual mortgage lenders.
The reason for this is that 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.
Conventional Loans Versus FHA Debt-To-Income Ratio Requirements
Fannie Mae and Freddie Mac set the debt-to-income ratio requirements on conventional loans. The maximum debt-to-income ratio on conventional loans is 50% DTI. However, it is very difficult to get an automated approval per AUS with a 50% debt-to-income ratio on conventional loans. You normally need a 680 credit score or higher for an AUS approval on conventional loans.
Conventional loans cap debt-to-income ratio at 50% back-end. There is no front-end debt-to-income ratio on conventional loans. Private mortgage insurance companies will not insure conventional loans with higher than 45% debt-to-income ratios unless the borrower has a 680 FICO credit score.
If you get an AUS approval with a 50% DTI, the private mortgage insurance company will need to approve whether they will insure the conventional loan. Most private mortgage insurance companies will only insure premium credit borrowers with up to 50% DTI. In general, the maximum debt-to-income ratio on conventional loans is capped at 45% DTI.
Case Scenario on Lender Overlays
For example, a lender can impose Overlays on debt-to-income ratios as follows:
- A lender can impose a 43% DTI debt-to-income ratio 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 FHA debt-to-income ratio requirements. The FHA debt-to-income ratio requirements can be higher than those of HUD. Mortgage Borrowers looking for a lender with no overlays on FHA debt-to-income ratio requirements can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at firstname.lastname@example.org.
Over 80% of our borrowers are homebuyers who could not qualify at other lenders due to lender overlays or because they got a last minute mortgage loan denial. Many of our borrowers do not meet the FHA debt-to-income ratio requirements of the other lender. Gustan Cho Associates are mortgage brokers licensed in 48 states including DC and Puerto Rico. We have lending partnerships with over 210 wholesale mortgage lenders.
Gustan Cho Associates has no lender overlays FHA debt-to-income ratio requirements. Gustan Cho Associates are mortgage brokers with no lender overlays on not just FHA debt-to-income ratio requirements but also has zero overlays on FHA, USDA, and Conventional loans. We just go off AUS FINDINGS. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.
This blog on FHA debt-to-income ratio requirements was updated on January 10th, 2023.
January 10, 2023 - 7 min read