FHA Debt
to Income Guidelines
Debt to income ratios are the calculations underwriters use to
determine whether a borrower can qualify for a mortgage. They are used to
determine if you have the capacity to repay your mortgage.
There are two
calculations. The first or Front Ratio is your housing expense-to-income
ratio. This is your proposed mortgage payment (principle, interest,
taxes, mortgage insurance, and home owners insurance) divided by your gross monthly income.
The second or
Back Ratio is your total monthly obligations-to-income ratio. This is your
gross monthly payment including Mortgage PITI divided by your gross
monthly income.
The only tricky part is understanding what is and is not included in
your total obligations and what can and cannot be included in your gross
monthly income. Below is a list of things to remember when you are
totaling all of your payments and all of your income.
Total Monthly Payments
Mortgage Payment:
Include principle, interest, taxes, and insurance (PITI).
Installment Accounts:
Do not count installment loans that have 9 or less months remaining.
Revolving Accounts (credit cards):
Include the minimum payment on all open accounts with a balance.
Co-signed Loans:
You will also have to include these, unless you can show twelve months of
cancelled checks from the person that is paying the loan and the loan must
not have any late payments.
Child Support:
Must be included.
Loans from a Previous Marriage:
Must be counted if you are getting a
Conventional, Conforming loan. However, If your divorce papers clearly
divide up the liabilities, FHA and non-conforming loans do not count them.
Do Not Include:
Utilities, telephone services, auto insurance, or childcare. (VA loans do
include childcare.)
Rental Liabilities
If you are vacating one principle
residence for another principle residence the mortgage payments will be included as a debt unless the LTV
on the vacated property is less than 75%. This is new as of September 2008
according to mortgagee letter 2008-25. You can download the letter
from this link: Mortgagee
Letter 2008-25
Gross Monthly Income
Overtime:
Overtime cannot be counted unless you have been receiving it consistently for two years and your employer will say that it is more than
likely to continue into the future.
Bonus:
Follows the same rule as overtime.
Commission:
Normally commission requires a two-year history in order for it to be
used. People changing from a salaried job to a commission job have tough
times getting mortgage loans until they can show two years in the field.
There are no-income verification loans on the market with slightly higher
rates for people paid by commission.
Self-Employed:
You must be self-employed for two years. Your usable income for a loan is
the bottom line on your federal tax return AFTER all the deductions. There
are things you can add back such as depreciation but to be perfectly
honest, most self employed people have difficulty achieving the required
monthly gross income because of all the tax write offs. Again, that is why
it is so wonderful that there are non-conforming loans that allow higher
debt to income ratios and no-income verification programs.
Child support:
You can use child support if you can prove that you will receive it for an
additional three years. The only acceptable proof of payment is cancelled checks or
a print out from the court if it is being paid through the court system.
Alimony:
Alimony follows the same rule as child support.
Required Ratios
Conventional Loans:
Fannie Mae and Freddie Mac allow a maximum of 28% for the front ratio and
36% for the back ratio. (28/36)
Non-Conventional:
FHA allows 31/43 and VA only uses the back ratio of 41% as a
guideline. VA also calculates what they call Adequacy Of Effective Income
and Balance Remaining for Family Support. This is a very complicated
worksheet so I won't go into it here. Ask your Loan Officer or give me a
call for more details.
Non-Conforming Loans:
This term simply means they do not conform to the rigid, strict guidelines
of conventional loans. Thank goodness! These loans usually only use the
back ratio and I have seen them go as high as 55%.
Now you have all the information you need to get more accurate results
from the calculators I have included for you on this site.
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