Ask 25 lenders what the limit is for debt-to-income (DTI) ratios on FHA loans, and you’ll receive 25 slightly different answers. You could also research it online and come up with the same variations. Either way, you’ll probably end up hopelessly confused. My goal with this article is to cut through the confusion, as much as possible.
Let’s start off by defining DTI:
Definition: The debt-to-income ratio, or DTI, is a numerical comparison between the amount of recurring debt a person carries, and the amount of money they earn each month. The math is done at the monthly level. To calculate your DTI ratio, you would simply divide your total monthly debts by your gross (pre-tax) monthly income. For example, if my monthly debts add up to $2,000, and my monthly income is $6,000, I have a DTI ratio of 33% (2,000 ÷ 6,000 = 0.33, or 33%).
Front-End and Back-End DTI
There are two types of debt-to-income ratios, where FHA loans are concerned:
- Your front-end DTI ratio only uses your housing-related debt — your mortgage payments, in this case. It is sometimes referred to as the housing-expense-to-income ratio.
- Your back-end DTI ratio looks at all of your combined debts. It includes the mortgage payments along with all other long-term recurring debts (credit cards, car loans, alimony, child support, etc.).
Lenders are more concerned with your back-end debt ratio, when it comes to mortgage approval. That number reflects the total debt load you will have, after taking on the new mortgage payments. So it’s a better indicator of potential affordability problems.
The DTI ratio itself is fairly easy to understand. It’s basic math. But when you add FHA loans into the mix, things get a bit more confusing. So let’s take it one step at a time.
Here’s a quote from the Department of Housing and Urban Development (HUD) website:
“With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.”
This seems fairly straightforward, and it does come straight from the horse’s mouth (HUD). But that doesn’t mean it’s set in stone. Remember those 25 lenders I mentioned earlier? They might give you different numbers.
Here is some helpful insight from George Souto, a mortgage loan originator from Connecticut. On his blog, Souto wrote the following:
“FHA has a [front-end] housing ratio of 45% and a total [or back-end] debt-to-income ratio as high as 55%+, but many lenders will not go that high on the [back end] … the lender I work for will not go beyond a 50% total debt-to-income ratio on a FHA mortgage.”
This was written earlier this year, in January 2013. So what do we learn from this? For one thing, Mr. Souto has given totally different numbers from those mentioned on the HUD website.
According to mortgage expert Dan Green, publisher of TheMortgageReports.com, total monthly debt “should not exceed 45% of the borrower’s household income.”
By now, you should realize these numbers are not always written in stone. Mortgage lenders can impose their own guidelines on top of those issued by HUD/FHA. These are known as ‘overlays,’ because the lender is laying its own (stricter) requirements on top of the government’s minimum requirements. It leads to much confusion among borrowers, but that’s just how the industry works.
Bottom line: If your total, or back-end, debt-to-income ratio exceeds 45%, you may have trouble getting approved for an FHA loan. But don’t let it stop you from trying. As you can see, there are exceptions to the rule.
2013: HUD Announces New Rule for Credit Scores, Debt-to-Income Ratios
In 2013, the Department of Housing and Urban Development announced a new rule regarding consumer credit scores and debt-to-income ratios. It relates to FHA loans, so it’s pertinent to this discussion. Here’s the gist of it: Borrowers with credit scores lower than 620, and back-end DTI ratios above 43%, will have to undergo a more rigorous (manual) underwriting process. Learn more here.