August 19, 2015
In our previous blog post about FHA loans and debt-to-income ratios, we mentioned two calculations the lender makes to determine whether or not an FHA loan applicant can truly afford the mortgage loan.
One of those calculations matches the applicant’s total “gross effective income” versus the amount of the total mortgage payment to make that determination.
According to HUD 4155.1, Chapter Four, “The relationship of the mortgage payment to income is considered acceptable if the total mortgage payment does not exceed 31% of the gross effective income.”
Naturally the FHA does make some exceptions for that 31% cap. “A ratio exceeding 31% may be acceptable only if significant compensating factors, as discussed in HUD 4155.1 4.F.3, are documented and recorded…” and the FHA also permits a higher debt to income ratio for borrowers who qualify under the FHA Energy Efficient Homes program:
“For those borrowers who qualify under FHAs Energy Efficient Homes (EEH), the ratio is set at 33%”.
But one important detail should be explained when it comes to determining your ability to afford an FHA mortgage–how the lender views the mortgage payment and what is calculated as part of the “total mortgage amount” for the purposes of determining the loan’s affordability for the borrower.
Some don’t realize that the basic monthly mortgage payment amount is not the only thing that gets added up here. According to HUD 4155.1 Chapter Four, there is a list of items that factor into the total mortgage amount for these purposes:
The lender’s total mortgage payment calculation includes the following:
–principal and interest
–escrow deposits for real estate taxes
–hazard insurance
–mortgage insurance premium
–homeowners association dues
–ground rent
–special assessments, and
–payments for any acceptable secondary financing.
It is true that some of these may not always apply depending on the transaction, but that’s definitely a conversation you would need to have with the lender as all FHA loans are different.
Do you have questions about FHA mortgages? Ask us in the comments section.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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