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FHA Debt to Income Guidelines

Federal Housing Administration (FHA) debt-to-income guidelines affect potential mortgage approval.

FHA Mortgage Background

Although the FHA does not actually lend money to borrowers, this organization guarantees loans for people who may not have otherwise been able to secure conventional financing without FHA’s assistance. The FHA is a part of the HUD, a governmental entity charged with the mission of making homeownership a reality for low and middle-income Americans, among other duties. Keep in mind, loans are not automatically granted to every applicant. FHA debt-to-income guidelines are but one of the qualifying factors.

What FHA Loans Can Do

When a potential homebuyer applies for a mortgage loan it is the bank’s job to predict the potential of the applicant to pay the loan back in a timely manner. FHA guarantees loans for borrowers, making them appear more creditworthy and less of a credit risk to lenders. This means lenders worry less about the likelihood of a future foreclosure because FHA takes on the responsibility for paying off the loan in the event you default. FHA loans are similar to VA loans in this respect. A borrower who applies for a home loan might not qualify based on conventional standards, but with an FHA guarantee they may wind up approved.

FHA Loans Aren’t Magical

Ultimately the loan acceptance rests upon the shoulders of the lender, not on the FHA. The FHA can offer a guarantee, but if the applicant does not qualify for a loan based on the lender’s criteria, then the mortgage loan application might be denied. Lenders may be willing to offer loans to applicants with lower credit scores and other detrimental factors if an FHA loan guarantee is in place, but each lender makes its own rules. Some of the items lenders consider when processing a mortgage loan application include:

• Debt-to-income ratio
• Credit history
• Assets
  • Cash savings
  • Investments
  • Retirement accounts
• Down payment amount

Lenders who process FHA loans (not all lenders do) must allow for certain ratios when considering a mortgage loan application. FHA debt-to-income guidelines, for example, are usually anywhere from 28 percent to 30 percent, based on several factors.

FHA Debt-to-Income Guidelines Explained

If applying for a loan guarantee through FHA, debt-to-income guidelines are an important factor. Figuring out a debt-to-income ratio is simple. Take the total amount of monthly financial obligations and divide it by the monthly income. The resulting amount is the debt-to-income ratio. For example, an applicant with $3,000 in monthly income and $700 in monthly debt has a debt-to-income ratio of 23 percent.

Debts considered when analyzing an FHA debt-to-income ratio include:

• Car payments
• Loan payments
• Credit card payments
• Court-ordered child support

Some financial obligations are not considered when analyzing FHA debt-to-income guidelines ratios:

• Child care expenses
• Utilities
• Debts which will be paid off in less than ten months
• Rent or current mortgage payment

Exceptions

Lenders might allow higher debt-to-income ratios in certain cases. If an applicant puts down more than the required three percent by FHA, then a higher debt-to-income ratio might be accepted. If the home being purchased qualifies as an energy efficient home, then the acceptable debt-to-income ratio is a little higher. Also, if the applicant has an abundance of assets or otherwise has the ability to pay off the home, then FHA lenders allow for higher ratios. These loans are also highly individualized in the sense that they are reviewed by human underwriters in addition to computer underwriting programs, so in special circumstances exceptions can be made.

Good News for Everyone Involved

FHA debt-to-income guidelines aren’t in place to be daunting, rather they are simply tools designed to ensure borrowers do not get in over their heads when taking on a mortgage loan. Obtaining a mortgage beyond your financial ability is simply not a good idea and can lead to eventual money woes. FHA guidelines work to the benefit of everyone involved. Borrowers get mortgage loans which they may not have otherwise qualified for, lenders get mortgage loans which they know will be paid, and the U.S. economy is stimulated by more home purchases.

Tags: FHA