November 24, 2010
The FHA has a maximum debt to income ratio set for FHA loans. When a borrower applies for an FHA mortgage, they must list all debts and lines of credit in detail as well as all possible approved income sources. With this information, the lender and FHA can calculate what a borrower’s debt picture is and issue a percentage of debt to the amount of income listed.
For FHA home loans, the rules are clearly spelled out. According to the FHA official site, “The FHA allows you to use 29% of your income towards housing costs and 41% towards housing expenses and other long-term debt.” Compare those percentages to those of a conventional home loan, where in most cases the borrower gets only 28% of the income to put toward housing, and 36% of the income to put towards housing expenses and other indebtedness.
It’s easy to assume these numbers are very unforgiving, but the FHA does offer some flexibility in the debt-to-income ratio requirements under the right circumstances.
An FHA loan applicant may be given some leeway with debt-to-income ratios when they have a large down payment, net worth that shows the lender’s flexibility is justified, or the buyer has the ability to pay more because of a large savings account or other cash reserves. There is also some flexibility allowed by FHA guidelines for borrowers applying for less than the maximum FHA loan terms. Does the borrower anticipate a decrease in monthly housing expenses? That can also change the situation.
It’s best to have a detailed conversation with the loan officer about these issues so he or she can re-calculate the debt to income amounts or work on making the FHA loan terms more flexible in this area.
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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