Maximum Debt-to-Income Ratio for FHA Loans: 43% to 50%

Your debt-to-income (DTI) ratio shows how much of your gross monthly income is being used to cover your recurring debts, including the estimated mortgage payment. It can also affect your ability to qualify for an FHA-insured home loan.

Here are five things you should know right off the bat:

1. Maximum debt-to-income ratio for FHA loans ranges from 43% to 50%.
2. Borrowers with compensating factors can have a DTI ratio up to 50%.
3. “Compensating factors” include cash reserves and residual income.
4. Conventional (non-FHA) home loans often limit borrowers to a DTI of 45%.
5. Conventional loans can be stricter in other areas as well, like credit scores.

FHA Loans: A Flexible Mortgage Product for Buyers

FHA loans are similar to conventional or “regular” mortgage loans in the sense that you are borrowing money from a bank or lender in the private sector.

But the FHA loan program is unique in other ways. Through this program, mortgage lenders receive insurance protection from the government, under the management of the Federal Housing Administration (part of HUD).

Because of this added protection, lenders can offer flexible qualification criteria for borrowers including credit scores and debt ratios. Generally speaking, it’s easier for home buyers to qualify for an FHA loan when compared to conventional (non-government-backed) mortgage products.

What Is a Debt-to-Income Ratio, Exactly?

When you apply for an FHA loan, the lender will review many different aspects of your financial situation. They do this in order to determine two things:

1. Whether or not you are qualified for a mortgage loan
2. The maximum loan amount you can afford to take on

During the pre-approval and mortgage underwriting process, the lender will look at your credit score, income, assets, and something known as the debt-to-income (DTI) ratio.

As you’ve probably already guessed, this ratio compares the amount of money you earn each month to the amount you spend on your various debts.

Example: If my combined recurring debts (including credit cards, my car loan, and the estimate mortgage payment) use up 30% of my gross income, then my total DTI ratio is 30%.

The FHA requires mortgage lenders to review a borrower’s debt-to-income ratio. The main goal is to minimize the amount of risk for all parties involved — the lender, the borrower, and the FHA itself.

• A lower DTI means that you have more income left over each month after paying your bills. This makes it easier for you to afford your mortgage payments, reducing the risk of default.
• A high DTI indicates that you might struggle to manage the monthly payments associated with an FHA loan, especially if unexpected expenses arise. This creates a higher level of risk.

FHA debt-to-income limits also protect you, as the home buyer and future homeowner. They can help you avoid taking on a mortgage loan that you might struggle to afford down the road.

Maximum DTI Ratio for FHA Loans: 43% – 50%

When it comes to FHA loan qualification, you actually have two debt ratios:

• The front-end ratio looks at mortgage and housing-related debts only. This would include your monthly mortgage payments, property taxes, etc.
• The back-end DTI ratio considers all of your monthly recurring debts. This includes your monthly mortgage payment, in addition to any credit cards, car payments, personal loans, etc.

The official HUD handbook for FHA loans states that borrowers can have a maximum qualifying ratio of 31/43. This means that a person’s total debts (including the estimated mortgage payment) should use no more than 43% of their monthly income.

But this is a general rule for which there are several exceptions. As you can see in the table below, FHA allows higher debt-to-income ratio limits for borrowers with one or more “compensating factors.”

For example, if a home buyer uses an FHA loan that results in only a minimal increase in housing payments (from what they were paying before), a higher debt level might be allowed. The same goes for borrowers with cash reserves in the bank and/or residual income left over after making their mortgage payments.

Types of Debts Included in This Calculation

So, what kind of “debts” are we talking about here?

FHA guidelines require mortgage lenders to review each borrower’s credit reports to ensure that all existing debts are used to calculate the total DTI ratio.

According to HUD Handbook 4000.1, the following types of debts should be counted as part of the DTI ratio for FHA loan purposes (in most cases):

• Alimony and child support payments
• Auto loans that require regular payments
• Business debt that shows up on the borrower’s credit report
• Debt collection accounts with balances more than $2,000
• Federal debts owed to the government
• Installment loans that require periodic payment
• Private savings clubs that require ongoing contributions
• Revolving charge accounts that require monthly payment
• Student loans

Note: Depending on your situation, you might have additional debts as part of your DTI ratio that are not shown in the above list. Your lender will be able to tell you what is or isn’t included.

In contrast, FHA debt-to-income ratios typically do not include: Monthly utilities, car insurance, cable bills, cell phone bills, health insurance costs, or groceries, entertainment expenses.

The Credit Score Connection

In the table above, you will also notice a credit score column. This is an important detail, because it directly relates to the maximum debt-to-income ratio that’s allowed for FHA loans.

This program allows for a minimum credit score as low as 500. But to qualify for the 3.5% down payment that’s so popular with home buyers, you’ll need a score of 580 or higher.

There’s also a credit score distinction when it comes to the DTI ratio limits for FHA loans:

• Credit score between 500 and 579: The borrower will probably be held to the 31/43 debt-to-income ratio limit shown in the table above.
• Credit score of 580 or higher: The borrower might be allowed to have a higher DTI, if they have one or more of the compensating factors shown above.

Note: These guidelines apply to most borrowers, but your situation could differ.

FHA vs. Conventional Home Loans

A “conventional” home loan is one that is not insured or guaranteed by the government. This label is used to distinguish from government-backed mortgage programs like FHA and VA.

Generally speaking, most conventional loan products limit the borrower to having a maximum debt-to-income ratio of 36%, or up to 45% in rare cases.

Many of the guidelines for conventional home loans come from Fannie Mae and Freddie Mac, the two corporations that buy mortgages from lenders. So let’s look at their guidelines.

Here’s what it says in Fannie Mae’s guide for mortgage lenders:

“For manually underwritten loans, Fannie Mae’s maximum total DTI ratio is 36% of the borrower’s stable monthly income. The maximum can be exceeded up to 45% if the borrower meets the credit score and reserve requirements reflected in the Eligibility Matrix.”

Similarly, Freddie Mac’s loan servicing guide states the following:

“When the Borrower’s monthly debt payment to income ratio exceeds 45%, the loan is ineligible for sale to Freddie Mac. As a guideline, the monthly debt payment-to-income ratio should not be greater than 33% to 36% of the Borrower’s stable monthly income.”

This is somewhat comparable to the FHA program. Though, as discussed earlier, some people who use FHA loans can have DTI ratios up to 50% with compensating factors. And that’s higher than the limit for a typical conventional loan.

Disclaimer: This article is based on information presented in the Single Family Housing Policy Handbook, the official handbook for FHA loans. This guide provides an overview intended for a general audience, so it might not apply to all situations. If you have questions about this subject, you can direct them to a HUD-approved mortgage lender or contact the FHA Resource Center.