FHA Debt-to-Income (DTI) Ratio Guidelines

Securing an FHA loan—or any mortgage loan—comes with several requirements, but one stands out as especially critical: debt-to-income (DTI) requirements. These guidelines show lenders how much of your monthly income is already committed to paying off debt, giving them a clear picture of your financial health.

A higher DTI can make it harder to qualify for a mortgage, as it indicates your earnings are already stretched thin. A lower DTI, though, can make it easier to get a loan — and qualify for favorable terms.

Thankfully, FHA loans come with flexible debt-to-income ratio requirements, helping borrowers with significant student loans, car payments, or other debts qualify for a mortgage. However, a higher debt-to-income ratio can make it harder to manage monthly expenses, increase financial stress, and even raise your interest rate.

Here’s how DTI factors into your FHA loan application.

Two DTI Ratios

Lenders use two different debt-to-income ratios when evaluating your application: the front-end DTI and the back-end DTI. Both are important to assess your financial capabilities as a borrower.

Front-End DTI

The front-end DTI reflects how much of your income your expected new housing payment will take up. So, if you expect a monthly housing payment of $2,000 and your monthly income is $4,000, you have a 50% front-end DTI (2,000 / 4,000).

In general, a good DTI ratio to shoot for is 28% or lower. This means your monthly housing expenses—including mortgage payments, property taxes, insurance, and association dues—should not exceed 28% of your gross monthly income. Staying within this range ensures manageable housing costs and may improve your chances of loan approval.

Back-End DTI

FHA lenders also look at back-end DTI, which is a more comprehensive number that factors all your monthly debt obligations — car payments, student loan payments, minimum credit card payments, and more.

A good back-end DTI ratio to aim for is 36% or lower, as this is often viewed by lenders as a sign of strong financial health. While FHA loans allow higher ratios (up to 43% or even 50% with compensating factors), staying below 36% gives you more room to manage other expenses and reduces financial stress.

What types of debt do lenders consider?

Typically, when calculating your DTI ratio, lenders consider recurring monthly debts like credit card payments, auto loans, student loans, and child support, along with your expected housing expenses (e.g., mortgage payment, property taxes, and insurance). However, non-recurring debts, such as one-time medical bills, are generally excluded.

The mix and size of your debts can impact how manageable your overall DTI appears to lenders.

Debt Type Matters

Lenders generally view secured debt, like a car loan or mortgage, as better for your DTI ratio compared to unsecured debt, such as credit card balances. This is because secured debts are tied to collateral, making them less risky and often more manageable due to lower interest rates. Additionally, debts with a clear repayment end date, like student loans or installment loans, are usually seen more favorably than revolving credit card debt, which can indicate ongoing financial strain.

Why Lenders Use the DTI Ratio

Lenders use DTI to gauge borrowers’ ability to repay their loans. If borrowers’ DTI is high, they already have a lot of debt on their plate, and adding another to the mix could make it challenging to stay current on payments. A lower DTI shows that a borrower still has plenty of free income to make their payments.

Overall, lower DTIs are considered lower risk for lenders and often qualify you for better loan terms.

How to Calculate Your DTI Ratio For an FHA Loan

Calculating your DTI is pretty simple, but you need quite a few numbers on hand.

Here’s how to go about it:

1. Round up all your monthly debt obligations: Check past account statements to determine how much you’re paying, log into your credit card dashboard, and check with your auto and student loan lenders for the most up-to-date numbers.

2. Have an accurate view of your income: Look at your paystubs to determine how much you make (pre-tax) for each month of the year. If it tends to vary, take the last two years of monthly income, add them up, and divide by 24. Use that as your income number.

3. Apply for pre-approval: You need to get pre-approved with a mortgage lender to determine your potential monthly payment.

4. Add and divide: Finally, start calculating. To calculate your front-end and back-end DTI ratios, use the following equations:
   
   Front-End DTI (%) = (Estimated Mortgage Payment ÷ Monthly Income) × 100
   Back-End DTI (%) = (Total Monthly Debt Payments + Estimated Mortgage Payment) ÷ Monthly Income × 100

Keep in mind that even small changes to your income and debts can alter your DTI, so try to keep your finances as stable as possible before your home purchase to help ensure an accurate view of your DTI.

Compensating Factors

If your DTI ratio is on the higher side, you may still qualify for an FHA loan with compensating factors. Compensating factors are positive financial attributes that lenders consider to offset risks associated with a higher DTI ratio. These factors reduce your risk as a borrower and make it more likely that you can stay current on payments despite your higher DTI.

Compensating factors include things like:

• Sizeable cash reserves

• An excellent credit score/credit history

• Income not typically included in calculations (a bonus that hasn’t been received for 2 years, for instance)

If your new mortgage payment is less than or equal to the rent/mortgage you successfully paid for the last 12 to 24 months, this can also qualify as a compensating factor.

4 Ways to Lower Your DTI Ratio

If you’re currently struggling to qualify for an FHA loan due to a high DTI ratio, there are steps you can take to reduce your DTI and more easily qualify.

To do this, you can:

Pay Down Your Debts

The more you can reduce your debt, the lower your DTI. Consider putting any windfalls you receive toward your debts, like tax refunds or holiday bonuses, or you can consolidate your debts, allowing you to roll your debts into one single payment, often at a lower interest rate.

Opt for a Lower-Priced Home

Your estimated mortgage payment plays a role in your DTI calculation, so choosing a lower-priced home with a lower monthly payment can reduce your DTI. Consider bringing in a larger down payment, as this reduces how much you need to borrow and your monthly payments.

Improve Your Credit Score

Improving your credit score before applying can help, too, as this can qualify you for a lower interest rate, which equates to a lower monthly mortgage payment. The better your score, typically, the lower your rate.

Learn more

To learn more about FHA loans or to find out if you qualify, reach out to a Neighbors Bank loan expert today.