WHAT ARE DEBT TO INCOME RATIOS (DTI)?-  

Below discuss debt-to-income ratios and the compensating factors that may be used to exceed the qualifying ratios.  As evidenced by the description of compensating factors, ratios can be exceeded when significant compensating factors exist.  Under FHA leding guidelines FHA does not set an arbitrary percentage that ratios may never exceed; however, the underwriter should judge the overall merits of the FHA loan request and determine what compensating factors apply and the extent to which ratios may be exceeded.

 Underwriting an FAH loan requires careful analysis of the many aspects of the FHA Loan request.  Each FHA loan is a separate and unique transaction, and there may be other factors that demonstrate the borrowers' ability and willingness to make timely FHA mortgage payments.  There is a danger of "layering flexibilities" in assessing FHA mortgage insurance risk, and simply establishing that a FHA loan transaction meets minimal standards does not necessarily constitute prudent underwriting.  The FHA mortgage  lender is responsible for adequately analyzing the probability that the FHA mortgage applicants will be able to repay the FHA mortgage obligation in accordance with the terms of the loan.

 Ratios are used to determine whether the FHA mortgage applicant can reasonably be expected to meet the expenses involved in homeownership. There are 2 calculations involved in the debt to income ratio.

 Under current FHA guidelines the current DTI is 31/43%, these ratios can be expanded based upon compensating factors.

Front end 31% of your before tax income or gross monthly income towards the housing expense. Your housing expense includes principal, interest taxes, insurance, association dues if applicable.

Back end 43%: of your before tax income or gross monthly income towards the housing expense including principal, interest taxes, insurance, association dues if applicable. Plus all other monthly payments reflected on your credit report.

 The FHA Mortgage lender must compute two ratios:

1. Mortgage Payment Expense to Effective Income - If the total mortgage payment (principal and interest; escrow deposits for real estate taxes, hazard insurance, the mortgage insurance premium, homeowners' association dues, ground rent, special assessments, and payments for any acceptable secondary financing) does not exceed 31% of the gross monthly income, the relationship of the mortgage payment to income is considered acceptable.  A ratio exceeding 31 percent may be acceptable only if significant compensating factors are documented and are recorded

2. Total Fixed Payment to Effective Income - If the total of the mortgage payment and all recurring charges reflected on the mortgage applicants credit report  does not exceed 43% of the FHA mortgage applicants gross monthly income, the relationship of total obligations to income is considered acceptable.  A ratio exceeding 43 percent may be acceptable only if the FHA mortgage applicant can document significant compensating factors.

Compensating factors are factors that may be used to justify approval of mortgage loans with ratios exceeding our benchmark guidelines. the compensating factor(s) must be documented to support FHA loan approval.  

Click here for a list of compensating factors that will justify Higher Debt to income ratios.

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