FHA Guidelines On Debt To Income Ratio On FHA Home Loans

FHA Guidelines On Debt To Income Ratio On FHA Home Loans

This BLOG On FHA Guidelines On Debt To Income Ratio On FHA Home Loans Was UPDATED On September 7th, 2018

FHA Guidelines On Debt To Income Ratio were updated 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 Loans as well as other mortgage programs
  • However, people need to realize that when push comes to shove, income is more important than credit when it comes to qualifying for mortgage
  • Borrowers 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 home purchase
  • But if borrower have little to no documented income, then they will not qualify for mortgage
  • On the flip side, borrower can have the following and qualify for mortgage as long as they have qualified income:
    • prior bad credit
    • open outstanding collection accounts
    • prior bankruptcy
    • prior foreclosure
    • charge off accounts

Borrowers can have the above but as long as they have qualified income with the likelihood of continuation for the next three years, they can qualify for mortgage.

FHA Loans

FHA Loans is the most popular mortgage program in the nation. FHA Loans are ideal for home buyers who are first time home buyers with less than perfect credit with higher debt to income ratios.

  • FHA is extremely generous when it comes to bad credit and low credit scores and collection accounts
  • Borrowers can qualify for a 3.5% down payment home purchase FHA Loans with a credit score as low as 580
  • Home buyers with credit scores between 500 and 579 can qualify for FHA Loans as long as they can put a 10% down payment on their home purchase
  • Borrowers can qualify for FHA Loans with outstanding collections and charged off accounts without having to pay them off

FHA Guidelines On Debt To Income Ratio And 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 borrowers gross monthly income
  • Monthly debt payments includes all monthly minimum payments such as the following:
    • 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
    • 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.

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 borrowers who have a credit score of at least 620 credit score.

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

Manual Underwriting

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
  • Verification Of Rent is required on all manual underwriting
  • No late payments in past 12 months with manual underwriting
  • Example of compensating factors are the following:
    • such as having reserves
    • larger down payment
    • additional income the borrower has but is not using to qualify
    • verification of rent with low payment shock
    • aged multiple credit tradelines
    • other positive factors

Debt To Income Calculations On Collection Accounts

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
  • FHA does not require the borrower to pay off or make any payment agreement with the creditor and/or collection agency

Qualifying For Mortgage With Lender With No Overlays

The Gustan Cho Team at Loan Cabin Inc. NMLS 1657322 is a full service national direct lender with no overlays on government and conventional loans. Loan Cabin Inc. has no lender overlays on FHA, VA, USDA, and Conventional Loans. Our team of licensed and support personnel are available 7 days a week, evenings, weekends, and holidays. Borrowers who need to qualify for mortgage with a direct lender with no overlays can contact us at The Gustan Cho Team at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com.

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.

    1. 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

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