Debt-to-income ratios (DTI ratio) are used by lenders to determine how much house you can afford.
Most mortgage loans require a max DTI ratio of 41%.
However, FHA loans are one type of mortgage that allows for higher DTI ratios, making it easier for low income borrowers to get approved.
Rate Search: Check Current Mortgage Rates
What is a Debt-to-Income Ratio?
The amount of a borrowers debt payments when compared to your gross monthly income is your debt-to-income ratio, also referred to as DTI ratio.
An an example, let’s say your monthly income before taxes is $5,000. $60,000 per year. You need to add up your total monthly debt payments, in this case we will say you have $500 in total payments. You also have an estimated mortgage payment of $1,000 per month. For a total of $1500 in monthly payments.
To figure the DTI ratio on an FHA home loan you need to take your total payments and divide that by your gross monthly income. In this case the DTI ratio is 30%.
FHA Max Debt-to-Income Ratios
For many mortgage loans the front-end ratio should be 28%, with a back-end ratio of no higher than 36%. However, FHA loans allow for DTI ratios of 31% front-end and 41% back-end. In some cases lenders may be able to accept a DTI ratio as high as 50%.
- FHA maximum debt-to-income ratio of 31/41
- VA loans only use one DTI ratio with a limit of 41%
- DTI limits for USDA loans are 29/41.
What do to if Your DTI Ratio is Too High
If you have low income and your ratios are too high then you have a few options that may help you qualify.
Use a Non-Occupying Co-Borrower
A non-occupant co-borrower is an additional applicant on the loan application that will not live in the home. If you have a friend or family member with good income willing to be a co-signer you can use there income to help lower your DTI ratio.
Increase Your Credit Score
There are certain compensating factors that may allow FHA-approved lenders to accept a higher DTI ratio from a borrower. Having a good credit score is one of those factors. You should work on improving your credit score as much as possible before applying for a mortgage.
Read our article on improving your credit score in 30 days for more information on increasing your scores.
Front-End Ratio – Housing Ratio
The front-end ratio is made up of all costs associated with a mortgage, not including your other debts. Sometimes also referred to as a housing-to-income ratio.
Housing expenses are your estimated monthly mortgage payment, homeowners insurance, HOA fees, and property taxes. Usually all of these expenses are included in your monthly payment using an escrow account.
For example: Your gross income is $5,000 per month. You have an estimated monthly mortgage payment, including taxes and insurance of $1,500 per month.
Take your mortgage payment ($1,500) and divide it by your monthly income ($5,000) for a total front-end DTI ratio of 30%.
The back-end ratio uses the amount of a borrowers total debt payments, not just the mortgage payment. Debt payments are any loans or lines of credit you pay on monthly. These include.
- Auto loans
- Credit card minimum payments
- Student loans
- Personal loans
- Child support
To figure your back-end ratio you need to add up all of your monthly payments and include your estimated mortgage payment and divide it by your gross pre-tax income.
Figure your DTI ratio using this calculator
Factors that Will Allow for a Higher FHA DTI Ratio
An FHA lender may be able to accept debt-to-income ratios as high as 50% for an FHA loan if a borrower has other positive factors that work in your favor. These compensating factors include:
- Large down payment
- High income
- 5 or more years at current employer
- Good FICO credit score
- Large amount of cash reserves