October 10, 2011
The debt-to-income ratio is an important calculation all home buyers need to understand. To qualify for an FHA home loan, potential borrowers should have a debt-to-income ratio of 43%. But what does that mean?
According to the FHA, that means that the total mortgage payment plus all monthly financial obligations cannot exceed 43% of the borrower’s “gross effective income”. It’s important to point out that the debt-to-income ratio does include the mortgage payment–not the amount of the borrower’s current financial obligations alone at the time of the FHA loan application.
Knowing the debt-to-income requirements can help a future borrower prepare for the FHA loan application because it’s as simple as doing the math on your income/expenses and set financial goals accordingly.
If you know a year in advance that your car payment, for example, might put you over the 43% ratio, you could plan to pay off the loan early and reduce the amount of your total monthly debt accordingly. Paying off a credit card bill or student loan before you apply is also a good way to lower the ratio.
But there’s a second part to the debt to income calculation that some potential borrowers might overlook–the FHA also has a rule about how much the mortgage payment itself may affect the ratio. Did you know FHA rules permit the mortgage payment to be no more than 31% of the gross effective income?
In other words, you may have a low debt-to-income ratio, but your should not have to use more than 31% of your income to pay the FHA
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.
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