How Your Debt Factors Into FHA Loan Approval
Your credit qualifications, including FICO scores and credit history, are very important factors in home loan approval. The amount of debt you carry will also be scrutinized by the lender, who must evaluate your monthly debt versus your monthly income to determine if you can realistically afford the mortgage. How does it work?
Your debt-to-income ratio (DTI) is what you get when comparing income with your monthly outgoing debt. To calculate your DTI, add up your monthly expenses:
- Rent /mortgage
- Minimum credit card payments
- Student loans
- Auto loans
- Any other loan payment
- Any other monthly costs
For FHA loans, your DTI ratio should be no higher than 45% if your credit score is below 580. Typically, conventional and FHA mortgages require a DTI ratio of 50% or less.
The rules governing debt ratios are found in the FHA loan handbook, HUD 4000.1. The lender is required to "determine the Borrower’s monthly liabilities by reviewing all debts listed on the credit report, Uniform Residential Loan Application (URLA), and required documentation".
The lender must review all monthly financial obligations but some things may not necessarily be included in your debt ratio. For example, "Closed-end debts do not have to be included” according to FHA loan rules,” if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower’s gross monthly income.”
This portion of the FHA loan rulebook adds, “The Borrower may not pay down the balance in order to meet the 10-month requirement."
Are you listed as an authorized account user on someone else's credit card or other debt? That may be a factor even if you don't use those accounts unless you have proper documentation. According to HUD 4000.1:
"Accounts for which the Borrower is an authorized user must be included in a Borrower’s DTI (debt to income) ratio unless the Mortgagee can document that the primary account holder has made all required payments on the account for the previous 12 months."
If less than three payments have been required on the account in the previous 12 months, FHA loan rules say, "the payment amount must be included in the Borrower’s DTI."
This section continues, stating that in cases where there is a loan secured against deposited funds, “where repayment may be obtained through extinguishing the asset and these funds are not included in calculating the Borrower’s assets”, the FHA does not require “consideration of repayment” to approve your loan.
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