November 23, 2010
FHA loans require many things from the borrower. The credit report, residence history, employment history and a list of all current outstanding debt must all be furnished to give the lender and the FHA a good picture of the borrower as a credit risk. When it comes to government home loans, all the information is needed since credit scores are not the determining factor in whether or not the FHA mortgage is approved.
An FHA borrower with good credit, a solid work history and a track record of on-time payments would seem to be a shoo-in for an FHA home loan. But there’s one thing that can offset the good things for the borrower if his or her debt-to-income ratio isn’t within the limits for an FHA loan.
The FHA requires a calculation of the debt to income ratio in order to see how much loan an applicant can reasonably afford. Too much debt and not enough income could spell trouble for the borrower later on; the FHA’s system is designed to prevent overly optimistic borrowers from getting in over their heads; it’s also designed to reduce the risk of default and foreclosure for the lender.
That’s one reason why the FHA (and the lender) requires so much detailed financial information on the loan application. It’s important to see the whole
picture–and not just to calculate how much debt the borrower may already have. If an FHA loan applicant has income they forget to include such as military bonuses, allowances, or other additional sources of income, it can make the debt-to-income ratio seem more severe than it really is.
It’s crucial to list all potential sources of income on the FHA loan application as well as the debts and outstanding credit card balances. A reenlistment bonus may be considered a one-time incentive by some, but if that bonus is paid out in installments over the course of the enlistment, it may be considered as additional income if the FHA approves. Special pay such as hazardous duty pay or language proficiency pay should also not be overlooked.
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: