December 5, 2011
The debt to income calculation is a very important part of a borrower’s FHA loan application review. The lender must analyze the amount of verified income and compare it to the amount of debt the borrower has to see whether the borrower can afford his or her current monthly obligations and the projected monthly FHA mortgage loan payment.
To do this, the lender takes income (only income which can be verified as stable and reliable) and compares it to all current debt and calculates what percentage the debt takes of the verified income. How is this done?
The lender adds up the total mortgage payment, which includes principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners’ dues, and any other payments that are considered part of the FHA loan obligation. Next the lender must calculate all recurring debt–both monthly revolving and installment debt. Those amounts are combined and divided by the gross monthly income.
The maximum debt to income ratio to qualify for an FHA loan according to FHA rules is 41%. Will your particular lender require additional qualifying factors beyond this ratio?
Yes. Credit card debt and other factors also come into play–just because a borrower has enough income to pay the mortgage loan payment every month doesn’t necessarily mean the borrower is a good credit risk. That’s why the FHA requires a credit check and other procedures as part of the FHA home loan approval process.
One area borrowers should know about when it comes to the debt to income ratio is a borrowers projected debt, which can come from balloon loans, student loans or other sources. Do these projected debts count in the borrower’s debt-to-income calculation? We’ll cover that topic in another blog post.
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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