July 14, 2011
Getting approved for an FHA home loan means submitting a lot of personal information to the lender which is used to calculate a potential borrower’s ability to repay the loan. Your lender will ask for information on your current debts, credit lines, loans and other details.
All of that information is compiled and compared to the amount of money the borrower gets from income sources the lender can verify. Once those details form a complete financial picture, the lender can make an educated decision on whether or not to approve an FHA home loan. The FHA allows 29% of your total monthly income to be used for housing costs and 41% towards housing expenses and other long-term debt.
Getting that “debt picture” can be tricky–some income sources are not considered verifiable, and some factors that affect a borrower’s income are not counted as “debt” for the purposes of calculating the debt to income ratio.
For example, FHA rules state that certain financial obligations don’t count as debt. These include, “federal, state, and local taxes; FICA or other retirement contributions such as 401(k) accounts (including repayment of debt secured by these funds)”.
According to the FHA, such obligations are not counted against the borrower’s gross income. But taxes and retirement contributions aren’t the only things not counted against your income for the purposes of approving an FHA mortgage loan. “Voluntary deductions” are not considered debt.
The expenses related to your daily commute to work are not counted, nor are “automatic deductions to savings accounts” or child care expenses. The FHA also allows union dues to be excluded from the debt-to-income ratio.
All of these exclusions can add up. Every little bit helps when it’s time to figure out that ratio–borrowers who are on tight budgets and may be close to the FHA loan limit for income versus debt may have a greater need for these exclusions in order to qualify for the best interest rates or terms.
It’s a good idea to discuss these areas with your lender or an FHA-referred counselor when it comes time to make a budget that includes an FHA home loan–after all, those dollar amounts may be excluded from the debt-to-income ratio calculation, but you’re still responsible for paying union dues or child care costs unless other arrangements are made. How do those expenses affect your actual bottom line once the FHA loan is approved?
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
Browse by Date: