In order to prevent homebuyers from getting into a home they cannot afford, FHA, Fannie Mae and Freddie Mac requirements and guidelines have been set in place requiring borrowers and/or their spouse to qualify according to set debt to income ratios. These ratios are used to calculate whether or not the potential borrower is in a financial position that would allow them to meet the demands that are often included in owning a home. The two ratios are as follows:
1) MORTGAGE PAYMENT EXPENSE TO EFFECTIVE INCOME
Add up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.). Then, take that amount and divide it by the gross monthly income. The maximum ratio to qualify for FHA is 31%. See the following example:
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| Total amount of new house payment: | $750 | |
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| Borrower's gross monthly income (including spouse, if married): | $2,850 | |
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| Divide total house payment by gross monthly income: | $750/$2,850 | |
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| Debt to income ratio: | 26.32% | |
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2) TOTAL FIXED PAYMENT TO EFFECTIVE INCOME
Add up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.) and all recurring monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.). Then, take that amount and divide it by the gross monthly income. The maximum ratio to qualify for FHA is 43%. See the following example:
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| Total amount of new house payment: | $750 | |
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| Total amount of monthly recurring debt: | $400 | |
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| Total amount of monthly debt: | $1,150 | |
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| Borrower's gross monthly income (including spouse, if married): | $2,850 | |
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| Divide total monthly debt by gross monthly income: | $1,150/$2,850 | |
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| Debt to income ratio: | 40.35% | |
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Please note that the above indicators do not exclusively determine whether or not a candidate will qualify for an FHA loan. Other factors will be considered, including credit history and job stability.
