FHA debt to income ratio explanation

Debt to income scaleThe amount of money that you can borrow with an FHA mortgage is largely dependent on a simple math formula called debt to income. There are two parts to the calculation. The first calculation is the payment estimation. The second calculation is the monthly debt analysis.

FHA lenders want borrowers to have a maximum mortgage payment that is approximately 31% of the gross monthly income. For example, if the monthly income is $3,332, the ideal mortgage payment would be $1,032.92 (.31 X 3,332 = 1,032.92). Lenders call this calculation the "front end ratio".

In addition to the payment ratio, FHA lenders also consider the amount of debt that is paid each month. Monthly bills include car, school, child support, alimony and other obligations. Lenders have a ratio for debt. The debt ratio is called the "back end" ratio. The debt ratio is the total about of debt that is paid each month and the proposed mortgage payment with real estate taxes, homeowners insurance, FHA mortgage insurance and any other monthly payment, such as a homeowner's association fee.

The "ideal" debt ratio is 43%. In other words, the total amount of debt, including the new mortgage payment should not exceed 43% of the monthly gross income.

Debt to income calculation
Proposed Mortgage payment $800.00
car payment $300.00
school loan $145.00
credit card payment $200.00
Total Monthly Debt $1,445.00
Monthly Income $3,332.00
Debt ratio $1,445.00 divided by $3,332.00 =0.43

But, like most things in life, there are exceptions. The FHA debt ratios can be exceeded provided there are "compensating factors".


FHA debt to income chart

FHA debt to income ratio exceptions


(B) Verified and Documented Cash Reserves
Verified and documented cash Reserves may be cited as a compensating factor subject to the following requirements. Reserves are equal to or exceed three total monthly Mortgage Payments (one and two units); or Reserves are equal to or exceed six total monthly Mortgage Payments (three and four units). Reserves are calculated as the Borrower’s total assets as described in Asset Requirements less:
-- the total funds required to close the Mortgage;
-- gifts; · borrowed funds; and
-- cash received at closing in a cash-out refinance transaction or incidental cash received at closing in the mortgage transaction.

(C) Minimal Increase in Housing Payment
A minimal increase in housing payment may be cited as a compensating factor subject to the following requirements:
-- the new total monthly Mortgage Payment does not exceed the current total monthly housing payment by more than $100 or 5 percent, whichever is less;
-- and there is a documented 12 month housing payment history with no more than one 30 Day late payment. In cash-out transactions all payments on the Mortgage being refinanced must have been made within the month due for the previous 12 months.
-- If the Borrower has no current housing payment Mortgagees may not cite this compensating factor. The Current Total Monthly Housing Payment refers to the Borrower’s current total Mortgage Payment or current total monthly rent obligation.

(E) No Discretionary Debt
No discretionary debt may be cited as a compensating factor subject to the following requirements:
-- the Borrower’s housing payment is the only open account with an outstanding balance that is not paid off monthly;
-- the credit report shows established credit lines in the Borrower’s name open for at least six months;
-- and the Borrower can document that these accounts have been paid off in full monthly for at least the past six months.

Borrowers who have no established credit other than their housing payment, no other credit lines in their own name open for at least six months, or who cannot document that all other accounts are paid off in full monthly for at least the past six months, do not qualify under this criterion. Credit lines not in the Borrower’s name but for which they are an authorized user do not qualify under this criterion.

(E) Significant Additional Income Not Reflected in Effective Income
Additional income from Overtime, Bonuses, Part-Time or Seasonal Employment that is not reflected in Effective Income can be cited as a compensating factor subject to the following requirements:
-- the Mortgagee must verify and document that the Borrower has received this income for at least one year, and it will likely continue;
-- and the income, if it were included in gross Effective Income, is sufficient to reduce the qualifying ratios to not more than 37/47. Income from non-borrowing spouses or other parties not obligated for the Mortgage may not be counted under this criterion. This compensating factor may be cited only in conjunction with another compensating factor when qualifying ratios exceed 37/47 but are not more than 40/50.
SOURCE: Handbook 4000.1 Last Revised: 12/30/2016 page 326

Frequently Asked Questions About FHA Debt to Income

What bills are included in the debt to income ratio?

All applicable monthly liabilities must be included in the qualifying debt ratio. Closed-end debts, such as car loans, do not have to be included in the calculation if the loan will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower's gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement.

I am a co-signer on a credit card account, does that count?

If the Borrower is an authorized user/co-signer on an account, the monthly payment must be included in a Borrower's debt to income ratio unless the borrower can document that the primary account holder has made all required payments on the account for the previous 12 months. Canceled checks or banks statements are usually sufficient documentation to exclude the liability.

It should be noted that if less than three payments have been paid on the account in the previous 12 months, the payment amount must be included in the Borrower's debt to income ratio calculation.

Does alimony and child support count?

Alimony and child support must be included in the FHA debt to income ratio provided the payments are court-ordered or otherwise agreed upon. The borrower must provide the lender with the official signed divorce decree, separation agreement, maintenance agreement, or other legal order.

I have student loans that are deferred

The lender is required to include all monthly obligations that are disclosed on the credit report. If the student loan is in deferred status and the likely monthly payment is not listed on the credit report, the lender is required to use 1% of the deferred loan as the monthly payment for debt to income purposes. For example, a $50,000 deferred loan is equal to a $500 monthly payment for FHA qualification.