Buying a home for the first time is an incredibly exciting process. However, you’ll have to make a lot of considerations, such as choosing a Dallas home loan and ensuring you qualify for it. The FHA loan, backed by the Federal Housing Administration, is geared towards first-time homebuyers due to its attractive terms and low down payment. For this reason, it’s a favorable option for those who don’t have a vast amount of savings to contribute immediately to their home purchase.
The great news about FHA loans is that they offer a lot of flexibility to borrowers, especially in terms of the required debt-to-income or DTI ratio. Borrowers can exceed 55 percent for their DTI and approach 50 percent for manually underwritten FHA loans. With this in mind, it is vital to choose the proper FHA lender since what they require will improve your chances of approval. Here’s what you need to know about the FHA DTI ratio:
Debts Included in the DTI Ratio
You’ll have to include pretty much debt payment in your FHA DTI calculation. These debts include the following:
- Auto loan payments
- Student loan payments
- Mortgage payments
- Credit cards or lines of credit payments
- Taxes, insurance, and association dues on free and clear properties, including land
- Alimony and child support
- Payment for the new proposed mortgage
- IRS and state income tax payment plans
Some debts do not report on the credit bureaus, which you must still have to disclose and count in your DTI ratio. Additionally, FHA does not consider loan payments against retirement funds in the FHA DTI ratio calculation. That means borrowing against a 401k for a down payment does not harm your qualification, but it lowers your asset. Be sure to consult a financial advisor before borrowing against your retirement account.
Calculating Your DTI Ratio for an FHA Loan
Once you’ve listed your debts and income, lenders calculate your DTI ratio with the two figures. The calculation is as follows:
Total housing payment plus any HOA dues ÷ calculated income
Here is a sample calculation:
$1,600 house payment ÷ $5,000 income = 32 percent housing ratio
Total debt to income ratio calculation:
$1,600 house payment + HOA dues + $1,000 other debts) ÷ $5,000 income = 52 percent total ratio
FHA Manual DTI Ratio Exceptions
The FHA DTI limits are 31 to 41 percent, although compensating factors can result in a higher figure. FHA manual guidelines permit up to a 40 percent housing ratio and a 50 percent total debt to income ratio. However, not many people know this, resulting in borrowers failing to enjoy a fair chance at homeownership.
To get an FHA DTI ratio exception, you’ll need high residual income, an energy-efficient home, minimal increase in housing payment, documented asset reserves, and ample additional income that isn’t included in effective income. Having any of these traits may allow you up to a 40 or 50 percent debt ratio, although it depends on your credit score.
Contact a Mortgage Specialist in Dallas, TX
Improving your DTI ratio will vastly enhance your chances of getting approved for an FHA loan. By using our guide, you can adequately prepare for your FHA loan application and get one step closer to achieving the dream of homeownership!
If you’re looking for an FHA loan in Dallas, Houston or throughout the state of Texas, let us know at New Frontier Financial! We are a team of mortgage brokers serving Texas and beyond. We can help you achieve your goal to purchase, refinance a home, or invest in real estate. Call us at (469) 886-8300 to find out more about how we can help!