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The Federal Housing Administration (FHA) uses ratio guidelines to determine whether potential borrowers can qualify for FHA insurance on their mortgage loans. The FHA program is less concerned with your credit history than it is with your ability to generate enough income to cover all your debt payments, including your new FHA loan.
One of the key numbers in the FHA ratio guidelines is the calculation of your total monthly debt. For purposes of this calculation, the FHA is concerned only with debt that will take you more than 10 months to pay off. Types of debt that fall under the total long-term debt category include car loans, student loans, large credit card balances and your new mortgage payment.
Another key number related to FHA ratio guidelines is your total monthly income. For FHA purposes, you should always use your pretax, or gross, income. This is the total amount the employer pays you before deducting any taxes or other withholding, not the net amount that you deposit in your checking account.
Mortgage to Income
The first FHA ratio guideline that you must satisfy is to show that your new mortgage payment will not exceed 31 percent of your monthly income. This means that for each $1,000 of monthly income you earn, the FHA will allow you a mortgage payment of $310. Keep in mind that the mortgage payment includes property taxes, dues if you are in a homeowners association, and mortgage and homeowner's insurance premium payments.
Total Debt to Income
The FHA also compares your total monthly payments on all your long-term debt to your gross monthly income. Absent extraordinary circumstances, this ratio should not exceed 43 percent. Again, this means that for each $1,000 of monthly income the FHA will allow you $430 in total long-term debt payments.
According to the FHA Handbook, the FHA will allow some variance from the standard 31 and 43 percent ratio guidelines. There are no hard and fast rules for these variances. Some lenders will allow higher debt-to-income ratios if the borrower has an excellent credit score, a higher than required down payment, or a significant amount of cash reserves or other assets.
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