February 27, 2015
A reader asks, “Hi. My wife and I are planning to buy a house. My wife has a stable job for six years as registered nurse and I is currently a homemaker. Both of us has credit score of 720+ and we never missed a single payment in our credit cards and personal loans. What is our chance to be approved if our debt to income ratio is 49%? Can we qualify for a “no-conforming loan”? (Loan amount is $225,000, please note that mortgage interest, principal, taxes, insurance, HOA fee are already included in the DTI.”
According to the FHA official site, many FHA loans are underwritten via an automated system. Here’s a quote from an FHA mortgagee letter from 2013 which announced changes to when and how a lender may be required to manually underwrite the loan instead:
Currently, most FHA-insured loans are underwritten through automated underwriting systems that score applications using FHA’s TOTAL (Technology Open to Approved Lenders) Mortgage Scorecard. The TOTAL Mortgage Scorecard evaluates borrowers based on credit scores and other loan factors.”
“When TOTAL delivers a Refer scoring recommendation or when borrowers were not scored because they do not have credit scores, lenders are required to manually underwrite the borrower. Specific policy revisions included in this regulation are reserve requirements for all manually underwritten borrowers, establishing maximum qualifying ratios based on credit score and compensating factors; and providing a revised list of acceptable compensating factors with objective documentation requirements for assessing these factors.”
A lender may be required to manually underwrite a loan when a borrower’s debt to income (DTI) ratio is too high. In this reader’s case that is likely to occur. The DTI may or may not be too high for loan approval depending on lender standards and other factors.
Here’s what FHA loan rules in HUD 4155.1 say about this:
“The relationship of total obligations to income is considered acceptable if the total mortgage payment and all recurring monthly obligations do not exceed 43% of the gross effective income. A ratio exceeding 43% may be acceptable only if significant compensating factors, as discussed in HUD 4155.1 4.F.3, are documented and recorded on Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary.”
A borrower who is on the fringes of what’s considered acceptable for DTI or FICO score may be able to get a loan approved with what the FHA terms “compensating factors” which may include a higher down payment, substantial cash reserves or other things that can work in the loan applicant’s favor. The only way to know for certain what may be possible is to discuss the situation with a lender and see what standards may or may not apply.
FHA loans have certain standards, but every borrower’s situation is different. It’s best to approach a loan officer with specific details and see what might be acceptable in situations like these.
Do you have questions about FHA home loans? Ask us in the comments section. All comments are held for review before posting.
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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