This article provides an overview of how lenders use two common measures of debt-to-income ratios to decide a borrower's eligibility for an FHA loan: the front-end ratio and the back-end ratio. It also explains how each ratio is calculated and what the borrower must do in order to qualify for the loan.
The front-end ratio is calculated by taking the sum of all monthly payments on housing and recurring debts, such as car loans or credit card payments, and dividing it by the borrower’s gross monthly income. The maximum allowable debt-to-income ratio for FHA borrowers is 31/43%. This means that the total of all monthly housing and recurring debt payments plus the proposed housing payment should not exceed 43% of the borrower’s gross monthly income.
The back-end ratio is calculated by adding all the monthly housing and recurring debt payments plus the proposed housing payment and other expenses, such as daycare or private school tuition, and dividing it by the borrower’s gross monthly income. The maximum allowable debt-to-income ratio for FHA borrowers is 56.9%. This means that the sum of all monthly housing and recurring debt payments plus the proposed housing payment and other monthly expenses should not exceed 56.9% of the borrower’s gross monthly income.
The article also explains how to calculate debt-to-income ratios when the borrower is self-employed. In this case, the debt-to-income ratios are calculated by taking the total monthly housing and recurring debt payments plus the proposed housing payment and other monthly expenses, subtracting the amount of qualified business income included in the borrower’s gross monthly income, and then dividing the result by it. The front-end and back-end debt-to-income ratios used for self-employed borrowers are the same as those used for borrowers who are employed by traditional employers.
Finally, the article explains that some FHA mortgage lenders have their own debt-to-income standards and may require the borrower to have a lower ratio than the FHA maximums. It also explains that a higher debt-to-income ratio does not necessarily mean that the borrower will be denied the loan; the lender will consider other factors, such as credit score, cash reserves, and job history.
The article “FHA Loan Debt-to-Income Ratios Part Two” provides an in-depth look at how FHA loan debt-to-income ratios are calculated and the different types of ratios used by lenders. It explains the front-end and back-end ratios and provides detailed instructions on how to calculate them. Additionally, the article provides information on how the debt-to-income ratios are calculated for self-employed borrowers. Finally, it notes that lenders may have their own requirements and that other factors can affect loan approval.
This article was contributed on Aug 21, 2023
