Real Estate Insight » new FHA guidelines

How Much Home Can I Afford? Calculating Debt to Income Ratios

Elliot Lau — Sat, 24 May 2008 11:16:30 +0000

When calculating how much home you can afford to buy, lenders use debt to income ratios (DTI) to determine how much you can safely borrow. There are two ratios used; front and back end ratios.

The front end ratio is a measurement of just the total monthly house obligations. The acronym PITI is commonly used. It stands for Principle, Interest, Taxes and Insurance. The Principle and Interest represents the montly mortgage payment, Taxes are the property taxes broken down to monthly increments, and Hazard Insurance to insure the structure from fire, natural disasters, etc. Although not part of the PITI acronym, monthly mortgage insurance payments and Association dues/fees if applicable would also be included when calculating the total monthly house expenses. The total of all of these monthly house expenses divided by your monthly gross income will be your front end ratio.
For conforming loans, the front end ratio is typically 28%
For FHA loans, the front end ratio is 31%.
Example:
Principle and interest payments= $1500
Property Taxes= $250
Insurance= $250
Total housing expenses= $2000

Gross annual income= $85,000
Gross monthly income= $7083 ($85,000 / 12 months)

Front end DTI= $2000 / $7083 = 28%

The back end ratio adds all monthly recurring debt to the total house debt to arrive at the back end ratio.

For conforming loans, the back end ratio is typically 36%

For FHA loans, the ratio is 43%.

VA loans only use one ratio of 41%

Example:
Car payment= $200
Credit card payments= $200
Student loan= $150
PITI= $2000
Total monthly debt obligations= $2550

Back end DTI = $2550 / $7083 = 36%

When a borrower’s DTI exceeds conforming ratios of 28/36, the borrower will have to consider nonconforming loans that allow higher debt ratios, some as high as 55%. These nonconforming loans, also known as sub-prime loans, come with higher interest rates to accommodate for the higher risk to the lender. With the recent meltdown in the mortgage industry due to the high rate of sub-prime loans defaulting, the industry will probably see a market correction that will revise these high sub-prime ratio limits downward.

Calculating FHA loans are a little different. You can click on this link to learn how to calculate FHA DTI ratios. http://www.crystalclearmarket.com/?p=142

Hope this helps. Until next time, Happy house hunting.

Elliot Lau

FHA Loan – Debt to Income Ratios

Elliot Lau — Sun, 27 Apr 2008 12:15:30 +0000

With 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:


Total amount of new house payment:	$750.00

Borrower’s gross monthly income (including spouse, if married) :		$2,850.00

Divide total house payment by gross monthly income:	$750/$2,850

Debt to income ratio:	26.32%

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:


Total amount of new house payment:	$750.00

Total amount of monthly recurring debt:	$400.00

Total amount of monthly debt:	$1,150.00

Borrower’s gross monthly income (including spouse, if married) :		$2,850.00

Divide total monthly debt by gross monthly income:		$1,150/$2,850

Debt to income ratio:	40.35%

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

FHA loan limits in OC and other cities

brian — Mon, 10 Mar 2008 18:08:27 +0000

Orange County has received the maximum allowable loan increase to $729,750 (175% of the previous conforming limit of $417,000).

FHA Max Loan Limits