Lenders use debt-to-income ratios (DTI ratio) to determine how much house you can afford.
Most mortgage loans require a max DTI ratio of 43%.
However, FHA loans are one type of mortgage that allows for DTI ratios as high as 50%, making it easier for low-income buyers to get approved for a home loan.
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What is a Debt-to-Income Ratio?
The amount of a borrower’s debt payments compared to your gross monthly income is your debt-to-income ratio (DTI ratio).
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 Debt-to-Income Ratio Maximum
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 a 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 a good income willing to be a co-signer, you can use their income to lower your DTI ratio.
Increase Your Credit Score
Certain compensating factors 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.
Please 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 comprises 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 borrowers’ total debt payments, not just the mortgage payment. Debt payments are any loans or lines of credit you pay 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
- A large amount of cash reserves