FHA Loan PlusThe Debt-to-Income Ratio You Need to Qualify for an FHA Loan
How much money can I borrow with an FHA loan?
Lenders
use a simple formula to calculate the maximum loan amount. The
calculation is known as the debt-to-income. In other words, how much
monthly debt can the borrower carry in comparison to his or her
monthly income?
FHA Front End Ratio
The FHA employs two computations. The first calculation is known
as the front end ratio. This computation calculates the maximum
mortgage payment. The second calculation, known as the back end
ratio, combines the monthly debt and the projected mortgage payment.
Let us now look at the payment ratio.
Assume a monthly gross income of $2,000 and a projected mortgage
payment of $700 (the mortgage payment comprises principle and
interest, 1/12 of the yearly real estate taxes, plus homeowners'
insurance, mortgage insurance, and so on).
Divide $800 by your monthly salary of $2,000.
The outcome is 35%.
FHA Back End Ratio
The back end ratio comes next. We'll suppose the borrower's monthly expenses total $300. Add the monthly expenditures and the anticipated monthly mortgage payment ($300 + $700 = $1,000). Next, divide $1,000 by the monthly income; the final figure is 50%. (too high).
The acceptable debt-to-income ratio is determined by the
applicant's credit score.
Here's a graphic from the FHA underwriting handbook that summarizes
the maximum debt-to-income ratios.
SOURCE: FHA Handbook 4000.1