FHA Underwriting Guidelines     

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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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