If you are applying for an FHA loan to buy a house, your debt-to-income ratio will be assessed. This article explains how DTI works and why it matters for FHA borrowers.
FHA loans are attractive loan options for home buyers because of their low credit score and down payment requirements. That said, buyers still have to get approved for an FHA loan, and part of the process involves lenders verifying debt-to-income ratios.
This ratio helps lenders determine whether or not a borrower would be able to handle an additional debt. A lower DTI is better, as it leaves more income to pay for a mortgage.
The FHA loan program is a popular financing method among home buyers in Washington. It’s particularly favored by first-time buyers, due to the low down payment and flexible qualification criteria that are allowed.
Definition: The debt-to-income, or DTI, is a percentage that compares the amount of money a person or household earns each month to the amount they spend on their recurring debts (credit cards, auto loans, mortgage, etc.) Example: A person who spends 40% of her gross monthly income on her various recurring debts has a combined debt-to-income ratio of 40%.
There are some general debt and income requirements for Washington home buyers who want to use the FHA loan program. The gist of them is that borrowers should have a manageable level of debt based on their monthly income, along with the financial capacity to make the monthly payments.
Over the last few years, the average debt-to-income ratio among FHA loan borrowers in Washington State and nationwide increased from earlier levels. During the last quarter of 2012, for example, the average DTI ratio among borrowers was 40.1%.
Lenders still review each borrower’s overall financial profile when determining FHA loan eligibility in Washington.
Related: Average credit score among borrowers
Most mortgage programs have some kind of limit when it comes to the borrower’s debt-to-income ratio. But with the FHA program, it’s more of a “soft” limit. There are several compensating factors that could offset a higher debt level.
That flexibility is one reason some home buyers in Washington choose FHA loans to begin with. The program can be appealing to borrowers with credit and/or debt issues that might prevent them from qualifying for other financing options.
But FHA isn’t the only mortgage program where standards have eased. The qualification criteria for conventional loans (which are not insured by the government) have also eased in recent years. This is something we’ve reported on in the past. Fannie Mae and Freddie Mac, the government-sponsored companies that buy home loans, have both increased their debt-to-income ratio limits to 50%.
Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you are ready to get pre-approved for a mortgage.
FHA lenders look at how much of a borrower’s gross monthly income goes toward recurring debts each month. In Washington State, lenders review this ratio as part of the overall approval process to decide whether the borrower can handle a new mortgage payment.
A debt-to-income ratio, or DTI, is the percentage of gross monthly income that goes toward recurring debts such as credit cards, auto loans, and housing payments. Lenders use it to measure how much debt a borrower is already managing before approving an FHA loan.
DTI matters because it helps lenders decide whether a borrower has enough income left over each month to afford a mortgage payment. A lower DTI is generally better because it leaves more room in the budget for housing and other expenses.
FHA DTI calculations generally include recurring debts such as credit cards, auto loans, and mortgage or housing payments. The goal is to compare ongoing monthly debt obligations against gross monthly income.
Yes, in some cases. The article describes FHA debt-to-income limits as more of a soft limit, which means a borrower with a higher debt level may still be approved when other compensating factors help offset that risk.
It can be. The FHA program is often viewed as more flexible because higher debt levels may still be acceptable in some cases, especially when supported by compensating factors. That flexibility is one reason some borrowers choose FHA financing.
No. Lenders also review the borrower’s overall financial profile when determining FHA loan eligibility. DTI is an important factor, but it is not the only part of the approval decision.
Yes. The article notes that average debt-to-income ratios among FHA borrowers in Washington State and nationwide increased from earlier levels, with an average of 40.1% reported during the last quarter of 2012.
Many first-time buyers are drawn to FHA loans because of the low down payment requirement and flexible qualification criteria. Those features can make FHA financing more accessible to buyers who may not qualify as easily for other mortgage programs.
A borrower generally improves approval odds by keeping debt at a manageable level relative to monthly income and showing the financial capacity to make the mortgage payment. Because lenders review the full financial picture, stronger overall qualifications can help when DTI is higher.
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