The Federal Housing Administration (FHA) is part of the Department of Housing and Urban Development (HUD). While neither bureau loans money, the FHA insures mortgages accepted by participating lenders. If a homeowner defaults in an FHA-backed loan, the federal government reimburses the lender. Due to this assurance, credit requirements, for example debt-to-income ratios, for FHA loans are generally less strict than for conventional mortgages, based on Tracey C. Velt of Bankrate.com.
Explanation
Debt-to-income ratios are simple measures used to judge a customer’s ability to repay a mortgage loan or other debt. Since Bankrate.com explains, lenders consider just two debt-to-income ratios. One considers mortgage debt relative to earnings. The other looks at how much overall debt–loan, credit card, auto and student loan debt–a customer has compared to his earnings. The greater a person’s debt-to-income score, the larger credit risk lenders consider them.
Guidelines
FHA debt-to-income ratios are somewhat more generous than the ones set by underwriters for conventional mortgage loans. Based on Velt’s report, FHA guidelines allow prospective homeowners to invest around 31 percent of their income on mortgage debt. Concerning overall debt, that amount sits at 43 percent, as of July 2010. When an applicant’s debt-to-income score are greater than 31 and 43 percent, respectively, they still might qualify for an FHA loan; it only gets tougher.
Option
HUD advises lenders to include comments on software with high debt-to-income ratios explaining why they consider the applicant an”acceptable risk.” Bankrate.com suggests that homeowners with high debt-to-income ratios request their lender to run them through HUD’s automated underwriting system. This procedure tends to permit greater debt-to-income ratios than manually-processed programs.
Considerations
Homeowners whose debt-to-income ratios exceed HUD/FHA guidelines must prepare to support their case. Bankrate.com suggests showing a record of on-time credit payments as well as the proven ability to fulfill a large mortgage payment. While FHA loans typically permit a down payment of as low as 3.5 percent, as of July 2010, Bankrate recommends increasing the ante to greater than 10 percent for a means to place lenders at ease.
Expert Insight
Velt’s report points out that debt-to-income ratio standards for loans other than FHA products must be somewhat low. For example, Fannie Mae and Freddie Mac use 28 and 36 percent thresholds as opposed to FHA’s 31 and 43 percent figures. Homeowners with surplus debt are not guaranteed an FHA loan. Based on Velt’s investigation, applicants for FHA loans accepted between January 2008 and August 2009 had moderate fico scores between 621 and 692. Additionally, FHA needs a comparatively sound recent–the last two years or so–credit history and evidence of reliable income.