FHA Loan Debt-To-Income Ratio Requirements

Home shopping is usually pretty darn fun. Figuring out how to pay for a new home once you’ve found that perfect place is not quite as enjoyable. Fortunately, there are a number of different loan options that can help you tackle this pesky part of the process.

One loan option that might make sense for you is a Federal Housing Administration (FHA) loan. Back by the U.S. Department of Housing and Urban Development (HUD), FHA loans (also known as 203(b) loans) are geared toward easing the financial requirements associated with homeownership.

These financial requirements are varied and numerous, including down payment amounts, credit score, monthly income and debt-to-income ratio (DTI). Here, we are going to focus on the FHA debt-to-income ratio.

What’s The FHA Debt-To-Income Ratio?

FHA loans consider both your expected housing expenses and consumer debt when determining your DTI. DTI ratios can often be approved more than 50% under some circumstances. These DTI rates are generally much lower than those associated with conventional and other types of loans. Offering less stringent requirements helps the FHA achieve its goal of providing homeownership access to more Americans.

What Affects Your Debt-To-Income Ratio For An FHA Loan?

There are two main categories of an FHA loan applicant’s DTI. The front-end ratio and the back-end ratio. Both of these ratios determine your likelihood of being approved for an FHA loan and how much you can borrow. Let’s take a closer look at each.

Front-End Ratio

The front-end ratio – also called a payment-to-income ratio (PTI) – is a calculation of the monthly housing expenses for your future home. The following factors will affect your front-end DTI:

• Principal for your loan: This is the amount you borrow, not including interest or other loan closing fees, to purchase your home.
• Interest on your loan: This is the price you pay to borrow the money, so to speak. Interest rates vary based on a number of factors, so check with your lender on interest rate projections for your specific loan.
• Property taxes: Municipalities charge taxes for roads, schools, parks and a litany of other services. These can vary greatly by area and are usually rolled into your monthly mortgage payment.

Back-End Ratio

The back-end ratio is a calculation of all your debts and the items included in the front-end ratio as well. These are obtained by your lender by reviewing your credit report. As mentioned above, borrowers can be approved up to 57% back-end ratio for FHA loan approval in some circumstances. The following factors will affect your back-end DTI:

• Credit card debt: Add up all your Visa, Amex, Discover1111 and any other credit card balances to calculate your overall credit card debt.
• Personal loans: These are loans taken out from a bank that don’t have any collateral.
• Student loans: Loans secured to pay for educational institution tuition and other qualifying school expenses.

How Is The Debt-To-Income Ratio Calculated For FHA Loans?

So, how does your lender use all of these numbers to calculate your DTI and determine FHA loan approval? First, they add up all of your monthly debt payments, including everything from both the front-end and back-end categories previously discussed. Next, they divide that total monthly debt payment by your gross monthly income. Finally, they multiply that number by 100.

Other Requirements For FHA Loans

FHA debt-to-income ratio is an important part of your FHA loan approval or denial, but it’s not the only factor. A number of other variables will affect your loan application. Below are the other factors that will affect your loan approval and the minimums for each.

• Credit score: If you’re putting 10% down on your home, you will need a minimum credit score of 500. If you’re putting 3.5% down, you will need a score of at least 580.
• Down payment: FHA loan down payment requirements vary based on a number of factors like credit score and DTI, but usually you will need to put down at least 3.5% of the sale price.
• Loan limits: The FHA has a limit on the amount of money they will back. Once you go over that limit, you are responsible for covering the rest. These limits vary depending on the year and are tied to the set limits for conventional loans.
• Mortgage insurance premium: To protect themselves from loss, lenders will require you to pay private mortgage insurance. This cost will be rolled into your monthly loan payment.

The Bottom Line

FHA loans can be a great financial tool for many Americans that can’t afford homeownership with a conventional loan. Before you start applying for loans, understanding factors that will affect your loan approval such as your debt-to-income ratio, will set you up for success. If you’ve done your homework and are ready to get started you can apply for an FHA loan today!