FHA DTI Ratio Requirements For Home Buyers

For many aspiring home buyers, a Federal Housing Administration (FHA) loan might be a good option. FHA loans appeal to home buyers, especially first-time buyers because they offer lower down payment rates and have more flexibility with credit scores and debt than some other loans.

The FHA has specific requirements for qualification. A key one is your debt to income ratio (DTI). Your DTI is your monthly debt divided by your pre-tax income. Essentially, it’s how much money you spend versus how much you have coming in each month.

If you’re applying for an FHA loan, your FHA DTI is a number you’ll want to understand as you start the home buying process. It can help determine your readiness to buy a home.

What is FHA DTI?

There are two types of DTI’s to know. The front-end DTI is the percentage of your income that will go toward your mortgage payment each month. The back-end DTI is the percentage of your monthly income that will go toward all of your monthly obligations, including your mortgage.

Your DTI helps lenders determine your risk. Typically, the lower your DTI, the more options you’ll have available. On the other hand, if you have a high DTI, it might indicate you could not afford the mortgage, and that’s a risky prospect.

What Are FHA’s Guidelines for DTI?

The FHA DTI limits in 2021 are 31% for front-end DTI and 43% for back-end DTI. However, the FHA DTI ratio isn’t always set in stone. The FHA offers some flexibility for borrowers.

For example, if you have an excellent credit score, a lot of savings, or a large down payment, your FHA DTI ratio may increase for both the front-end and backend to a maximum of 40% and 50%, respectively.

How is DTI calculated for an FHA loan?

To calculate your debt to income ratio, FHA looks at a variety of obligations, including but not limited to:

• Credit cards
• Lines of credit
• Auto loan payments
• Student loan payments – Learn FHA student loan payment requirements
• Other installment loans or leases
• Mortgage payments
• Taxes, insurance, and association dues on free and clear properties (including land)
• Payment plans for IRS and state income tax
• Alimony and child support
• The amount of the proposed new mortgage

If you have any debts not reported to the credit bureaus, you must disclose those as well for the FHA to include them in their calculations.

The FHA doesn’t count any loan payments taken against retirement funds. So, for example, borrowing from your 401(k) for a down payment isn’t included in the DTI calculation; however, your total assets will be lower. Always discuss borrowing from your retirement funds with your financial advisor first.

Once all of your debts and income have been calculated, the FHA uses the following formulas:

Housing debt to income ratio calculation (front-end DTI):

Total housing payment plus any HOA dues / calculated income
$1000 house payment / $5000 income = 20% housing ratio

Total debt to income ratio calculation (back-end DTI):

Total housing payment, HOA dues, and other debts / calculated income
($1000 house payment + HOA dues + $1000 other debts) / $5000 income = 40% total ratio

Once calculated, your numbers are run through an automated underwriting system. However, if you aren’t approved right away, it doesn’t mean you’re denied a loan. The FHA also allows for manual underwriting, but you still must meet their guidelines.

How is DTI calculated for VA, USDA, or Conventional loan types – are there any main differences?

While all lenders will calculate your DTI, we all won’t have the same guidelines. You might find yourself approved for one loan and not another based on your DTI.

Typically, the primary difference between FHA DTI and other loan types is the FHA offers more flexibility. As a result, you can have a lower credit score and down payment, and you may have higher levels of debt than conventional, VA, and USDA loans.

What can I do to improve my FHA DTI?

You may want to explore options for lowering your DTI. Doing that can help you get better rates on your mortgage and a variety of other loans. So it’s worthwhile to give it a try.

Here are a few ways you may be able to improve your FHA DTI ratio:

• Improve your credit score
• Avoid adding more debt to your credit cards
• Increase the amount you pay toward your debt each month
• Increase your income through a salary bump or a side hustle

It’s always a good idea to keep an eye on your debts and expenses, especially if you’re exploring buying a new home.

If you’re interested in an FHA loan, we can help. Explore our resources to learn more about FHA loans or you can begin your QuickStart application.