Understanding FHA loan ratios are an important part of getting your loan approved for a FHA home loan.
There are two ratios that you need to know and understand when it comes to FHA loans.
FHA Front-end Ratio
The first one is what many people call the “front-end ratio.” This ratio is the percentage of the proposed house payment in relation to the borrower’s gross income. Currently, FHA guidelines say that the payment cannot be more than 31%of their gross income.
So, let’s say that the borrower has a gross income of $4500 per month. According to FHA requirements, their payment cannot be more than 31% of the $4500 income which would be a maximum payment of $1395. The front-end ratio simply looks at how much of a house payment you could qualify for based on your income.
FHA Back-end Ratio
The second of the FHA loan ratios is what people call the “back-end ratio.” It is a similar measurement as the front-end ratio but it also includes the other monthly debts of the borrower. The current guideline for the back end payment is 43% of the monthly gross income.
Using the same information from above (the borrower with $4500 monthly income), we can use an example. Let’s say that the same borrower has a car payment of $350 per month and a credit card payment of $150 per month. Their total debts would be $1895 ($350 + $150 + $1395 = $1895). At $1895, they would have a total debt to income ratio of 42% which is below the FHA requirements.
What happens if someone is just over the ratio? There are options for working with someone in this situation. If the borrower has a lot of debts, they could simply pay some of them down. We could get a lower cost insurance policy which would lower the total house payment. Or…
FHA also allows for something called “compensating factors.” This means that they will make allowances for borrowers that have a higher ratio under certain circumstances. If these circumstances can be documented, there are options to go higher. The list is long but it could be a demonstrated ability to save money, a large down payment, previous credit history of paying a high payment for housing and the list goes on.
This is why you want to work with someone that knows the guidelines for FHA loans. I can help you find ways to get the loan approved and help you buy the home you want.