FHA Loan – Debt to Income Ratios
04/27/2008 – 4:15 amWith lax lending practices during the past decade, FHA loans became almost non-existent. Those times have come to a screeching halt and as the mortgage melt-down continues and conventional loan programs continue to be eliminated, borrowers are turning more and more to FHA loans since they are practically the only loan available to those with little cash for the down payment.
FHA loans differ from conventional loans in the way the lender qualifies the borrower. For years, lenders have been using FICO scores as a main component in the decision making process for conventional loans. FHA loans use debt to income ratios over FICO scores to determine the borrowers eligibility for the loan. FHA loans enable a borrower with challenged credit to obtain a loan provided that the borrower’s debt ratios fall within FHA limits.
In order to prevent home buyers from getting into a home they cannot afford, FHA guidelines have been set in place requiring borrowers and/or their spouse to qualify according to set debt to income ratios. These ratios are used to calculate whether or not the potential borrower is in a financial position that would allow them to meet the demands that are often included in owning a home.
The two ratios are as follows:
1) Mortgage Payment Expense to Effective Income
Add up the total mortgage payment (principal and interest, property taxes, hazard insurance, mortgage insurance premium, homeowners’ dues, etc.). Then, take that amount and divide it by the gross monthly income. The maximum ratio to qualify is 29%.
example:
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Total amount of new house payment: |
$750.00 |
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Borrower’s gross monthly income (including spouse, if married) : |
$2,850.00 |
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Divide total house payment by gross monthly income: |
$750/$2,850 |
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Debt to income ratio: |
26.32% |
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2) Total Fixed Payment Expense to Effective Income
Add up the total mortgage payment (principal and interest, property taxes, hazard insurance, mortgage insurance premium, homeowners’ dues, etc.) and all recurring monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.). Then, take that amount and divide it by the gross monthly income. The maximum ratio to qualify is 41%.
example:
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Total amount of new house payment: |
$750.00 |
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Total amount of monthly recurring debt: |
$400.00 |
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Total amount of monthly debt: |
$1,150.00 |
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Borrower’s gross monthly income (including spouse, if married) : |
$2,850.00 |
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Divide total monthly debt by gross monthly income: |
$1,150/$2,850 |
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Debt to income ratio: |
40.35% |
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Please note that the above indicators do not exclusively determine whether or not a candidate will qualify for an FHA loan. Other factors will be considered, including credit history as opposed to the FICO score and job stability.
Hope this helps shed some light on FHA loans as they become more and more popular. Until next time, happy house hunting.
Elliot Lau
2 Responses to “FHA Loan – Debt to Income Ratios”
There have been so many changes that it’s been hard to keep up. Thanks for this post!
By brian on Apr 27, 2008
Wow this loan looks really very good, I really hope I qualify for this.
By Mitch Konzal on Sep 22, 2011