One of the main pieces of an FHA loan approval is the borrower’s debt to income calculation. It is important that home buyers understand how this number is calculated and what they can do to improve their chances of getting approved.
Payments Included in Debt Ratios
Certain payments must be considered as part of a person’s overall debt when calculating the ratios. Items such as:
- Payments for car loans
- Payments on credit cards
- Payments on unsecured loans
- Child support payments
- Alimony
Items Excluded from Debt Ratios
There are also some items not included in the debt to income ratio for FHA loans. Common examples would be:
- Current rent payment
- Money spent on entertainment
- Expenses paid for child care
How to Overcome High Debt to Income Ratios
If a borrower has a compensating factor, it is possible for people with ratios higher than the proposed guidelines to get an approval for an FHA loan. Here are some examples of compensating factors:
- Paying more than 10% of the purchase price as a down payment
- Using income and expense records from the past two years to demonstrate that you have the ability and discipline to pay the housing expense
- Having a large balance in a savings, investment or retirement account
For people that have a high debt to income ratio, it is possible to reduce the numbers. Paying off debt, such as credit cards or car loans can help. Sometimes it may be necessary to sell an expensive vehicle and get a cheaper payment in order to qualify for a loan.
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