FHA Loan Debt to Income Ratio Rules for 2017
The debt to income ratio or DTI for short is one of the most important factors in the lender's decision to approve or deny a home loan. DTI can be just as weighty as a credit score when it comes time to approve the mortgage. How does the lender view your DTI?
The debt to income ratio is a calculation your lender is required to make by taking your verifiable income compared to the amount of your monthly financial obligations. This ratio is calculated with and without your proposed mortgage payment-doing so is required by FHA loan rules to make sure a potential borrower can afford the new FHA mortgage loan payments.
According to HUD 4000.1, pages 177 and 178, the lender must calculate the DTI as follows:
"The Mortgagee must review all credit report inquiries to ensure that all debts, including any new debt payments resulting from material inquiries listed on the credit report, are used to calculate the debt ratios. The Mortgagee must also determine that any recent debts were not incurred to obtain any part of the Borrower’s required funds to close on the Property being purchased."
The phrase "material inquiries" mentioned above is defined in HUD 40001. as follows:
"Material Inquiries refer to inquires which may potentially result in obligations incurred by the Borrower for other Mortgages, auto loans, leases, or other Installment Loans. Inquiries from department stores, credit bureaus, and insurance companies are not considered material inquiries."
Some wonder how a participating FHA loan officer acquires this debt information; HUD 4000.1 explains, "The Mortgagee must determine the Borrower’s monthly liabilities by reviewing all debts listed on the credit report, Uniform Residential Loan Application (URLA), and required documentation. All applicable monthly liabilities must be included in the qualifying ratio." Potential FHA borrowers should keep this in mind when considering new lines of credit in the 12 months or so leading up to a home loan application. It’s best not to apply for new credit during this time and to work on reducing unnecessary lines of credit.
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