As we head into 2016, many mortgage lenders are limiting back-end debt-to-income (DTI) ratios for FHA loans to 45% or below. Some lenders may allow for a higher back-end debt ratio in cases where there are “compensating factors,” while others may be more strict with this particular criteria. It varies than one lender to the next. But the general trend line across the industry seems to be 45%.
Note: This article pertains to the DTI limits used by mortgage lenders, based on informal surveys and conversations. You’ll find HUD’s official debt ratio guidelines elsewhere on our website.
For those who aren’t familiar with these terms, here are some brief definitions:
FHA Loan — This is a mortgage loan that is insured by the Federal Housing Administration, a government agency that falls under the Department of Housing and Urban Development (HUD). These loans are generated in the private sector just like any other type of mortgage. The difference is that the lender is insured against losses that may result from a borrower default. Thus, they are also referred to as government-backed or government-insured loans.
Debt-to-Income Ratio — This is one of the factors a lender will consider when you apply for an FHA loan. Your debt-to-income ratio, or DTI, is simply a comparison between your monthly recurring debts and your monthly earnings. This number is important to mortgage lenders because they want to ensure you are not taking on too much debt with the new loan payments. There are two kinds of debt ratios. The front-end ratio compares your housing debt / mortgage payments to your gross monthly income. The back-end ratio (the subject of this article) factors in all of your combined debts, including the loan payments.
Back-End Debt Ratio — With this ratio, the lender will consider all of your monthly debts including your monthly mortgage payments. They will also factor in car payments, minimum credit card payments, and any other bills that you pay every month (aside from utilities). They will divide your total debt by your gross monthly income to come up with a percentage. This percentage is your back-end debt-to-income ratio, and it’s a key part of the FHA underwriting and approval process.
FHA Back-End Debt Ratios in 2016: Where’s the Bar?
So, what will mortgage lenders be looking for next year? Where will they set the bar for FHA back-end debt ratios in 2016?
As mentioned earlier, this will vary from one lender to the next. Based on conversations we’ve had with brokers and loan officers, it seems that some lenders in 2016 will go as high as 45% – 50%, while others are setting the bar lower at 43%. This means that if your combined debts (including the home loan payments) use up more than 45% of your gross monthly income, you might have a harder time qualifying for an FHA mortgage. But “might” is the key word in that last sentence. There are exceptions to the rules for FHA loans and back-end debt ratios.
The point of this article is simply to make you aware of DTI ratios, and how they can affect you when applying for an FHA loan. As a borrower, you should have some idea where you stand, in terms of your total debt level. The last thing you want is to go into this process with a blindfold on.
Where to learn more:
HUD Handbook 4155.2, Mortgage Credit Analysis (see Chapter 4, Section F)
Disclaimers: We make every effort to ensure the accuracy of all content posted on this website. But lending standards change all the time. As a result, these “rules” are not necessarily set in stone. For the most current and accurate information relating to back-end debt ratios for FHA, please refer to the HUD.gov website. You can also find answers within HUD Handbook 4000.1, the Single Family Housing Policy Handbook (available on Allregs.com). This information has been offered for educational purposes only and does not constitute financial advice.