Definition of a Debt-to-Income Ratio
The (DTI) debt-to-income is a percentage that shows how much of an FHA mortgage applicants income is used to cover his or her recurring debts. FHA mortgage lenders calculate DTI at the monthly level using the borrower’s gross, or pre-tax, income.
There are actually two numbers used for FHA qualification:
- The “front-end” ratio looks at housing-related debts only (monthly mortgage payments, property taxes, etc.).
- The “back-end” number takes all recurring monthly debts into account. This can include the mortgage payment, credit cards, car loans, etc.
Credit score over 580 max DTI is 56.9% of your gross monthly income.
Credit scores under 580 max DTI is 43% of your gross monthly income.
Compensating Factors for Borrowers with High Debt
On the surface, this suggests that borrowers with DTI numbers above the stated limits could have a harder time qualifying for FHA Mortgages. But that’s not always the case. There are exceptions to the official debt-to-income caps.
FHA gives FHA mortgage lenders some leeway to approve borrowers with DTI ratios higher than the above-stated limits, as long as the lender can find and document “compensating factors.”
A partial list of compensating factors is presented below.
- Minimal increase: If the FHA Mortgage being sought will only cause a minimal increase in the borrower’s housing expense, he or she may still qualify for an FHA Mortgage with a higher-than-average debt burden.
- Cash reserves: We touched on this earlier, under “savings.” FHA mortgage lenders can make DTI exceptions for borrowers who have substantial cash reserves in the bank. In this context, “substantial” means the borrower has at least three months’ worth of mortgage payments in the bank after closing.
- Down payment: FHA requires a minimum down payment of 3.5% for FHA Mortgages. Making a down payment above the minimum could create an exception to the debt-to-income limits mentioned above. For instance, borrowers who put down 10% could still qualify for an FHA-insured mortgage loan, even if their DTI ratios are higher than the 2015 limits mentioned earlier (31% / 43%).
- Payment history: If, in the past, the applicant has successfully managed mortgage payments equal to or greater than the estimated payments on the loan they are currently seeking, he or she may still qualify for the program.
- Savings: FHA also allows FHA debt-to-income exceptions for borrowers who have demonstrated a “conservative attitude toward using credit” in the past, and have the ability to accumulate savings. In other words, limited use of credit and substantial savings could work in your favor, even if your DTI ratio is higher than the stated limits.
- Good credit: The borrower’s credit history plays a role here as well. In short, borrowers with excellent credit scores have a better chance of getting approved for a government-insured home loan, even if their debt exceeds the minimum FHA guidelines.