HUD DTI Guidelines on FHA Loans

This guide covers HUD DTI guidelines on FHA loans. We will discuss the latest update on HUD DTI guidelines on FHA loans. HUD DTI guidelines are probably the most generous out of all mortgage loan programs. DTI, or debt-to-income ratio, is the sum of all borrowers’ monthly payments divided by gross income. All mortgage loan programs have debt-to-income requirements. Conventional loan DTI guidelines are capped at 45% but can go up as high as 50% DTI on higher credit score borrowers.

There is no front-end debt-to-income ratio on conventional loans, unlike FHA loans. Front-end debt-to-income ratios are the principal, interest, taxes, and insurance ( PITI ) divided by the monthly gross income.

HUD DTI guidelines for borrowers with under 620 credit scores are capped at 43% DTI to get an approved/eligible rating per the automated underwriting system. HUD DTI guidelines for borrowers with credit scores of 620 and higher is 56.9% back-end debt-to-income ratios and 46.9% front-end to get an AUS approval. In this article, we will discuss and cover HUD DTI guidelines, mortgage guidelines, and overlays.

HUD DTI Guidelines for FHA Loans

DTI Ratio Basics

The debt-to-income ratio is considered to be one of the most important aspects of qualifying for an FHA loan since it calculates the borrower’s monthly debt obligations based on their income.

Two Classes of DTI Ratios

Front-End DTI (Housing Ratio)

• Includes housing-related costs only.
• Generally, it consists of mortgage payments, property taxes, insurance, and HOA fees.
• Maximum recommended: 46.9%.

Back-End DTI (Total Debt Ratio)

• Includes all monthly debt payments.
• Housing expenses plus debts of all recurring expenses.
• Maximum recommended: 56.9%

Standard DTI Guidelines

Conventional Qualification: There is no front-end debt-to-income ratio on conventional loans.

• Maximum Front-End DTI: 45%.
• Maximum Back-End DTI: 43%.

Compensating Factors Allow for Higher DTI

Borrowers qualify with higher DTI ratios if they:

• Have a high credit score (700+)
• Maintain significant cash reserves
• Have a low debt
• Stable employment history
• Additional sources of income

Expanded DTI Allowances

Manual Underwriting Scenarios

• Overall maximum DTI can go up to 50-57%
• Full financial evaluation required.
• Strong compensating factors are needed
• More evidence needed

Examples of Compensating Factors

• Small increase to payment obligated towards housing costs
• More liquid assets
• Cautious use of credit
• Low consumer debt
• Substantial emergency savings
• Professional career that leads to significant income increase

Calculating Debt

Debts Covered

• Rent/mortgage
• Tax related to property
• Insurance payments
• Fees collected by Homeowners Associations (HOA)
• Auto loans
• Student loans
• Credit score minimum payment obligations
• Personal Loans.
• Alimony or child support payments.
• All other debts have fixed monthly payments.

Excluded Debt Types

• Utility payments.
• Mobile phone plans.
• Subscriptions to social media and online streaming services.
• Food purchases, including groceries and dining out.
• Recreational and leisure activities.
• Medical and health-related expenses.
• Auto insurance.

Special Scenarios

Student Loans Debt Calculation

• Use the actual monthly payment if income-driven repayment methods are employed.
• If a payment is $0, use 1% of the total loan balance.
• For fully amortized loans, use the standard monthly payment.

Self-Employed Income

• Average net income from the preceding two years.
• Preferred steady income or increasing income.
• Must submit additional documentation.

Multiple Income Sources

• It must be documented and consistent.
• Generally, it requires a two-year history.
• Calculated over 24 months.
• Seasonal income needs careful calculations.

Impact on Credit Score

Credit Score Thresholds

• 580+ – Minimum requires 3.5% of the home’s sale price for down payment.
• 500 – 579 – 10% of the purchase price required.
• Under 500 – Usually does not meet the required standard.

Relation between DTI and Credit Score.

• Offset higher DTI with higher credit scores.
• More stringent rules around DTI with lower credit scores.

Other Factors To Bear In Mind

Homebuyer Programs For Newbies

• Lose rigid restrictions around DTI.
• Help with the down payment.
• Training offered.

Various Loan Types Wielding Influence Over DTI

• Fixed-rate mortgages – considered more reliable.
• Adjustable-rate mortgages – subjected to harsher scrutiny.

Special Mortgage Calculations for FHA 203(k) Rehabilitation Loans

Recommendation for Borrowers

Preparation Steps

• Eliminate any debt, if possible.
• Increase your credit score.
• Set aside more money for emergency savings.
• Stay at one job for a longer period.
• Reduce the total number of new credit accounts.
• Use pre-approval to check eligibility and qualifications.
• Also, obtain a soft pre-qualification for a better understanding of exact qualifications.
• Discretion with the lender

Pivotal Remarks

• These are the HUD policies.
• Other lenders can have additional policies.
• Flexibility is possible with manual underwriting.
• Check every file so specific documents can be requested.
• It is advisable to check various requirements with the appropriate lenders that FHA has approved.

Automated Underwriting System Approval (AUS) Versus FHA DTI Manual Underwriting

All government and conforming loans need to go through either Fannie Mae or Freddie Mac’s Automated Underwriting System (AUS).

• Fannie Mae’s Automated Underwriting System is called Desktop Underwriter or DU
• Freddie Mac’s Automated Underwriting System (AUS) is the Loan Prospector or LP
• The automated underwriting system (AUS) is an intricate sophisticated computerized automated mortgage system that analyzes borrowers credit and income profile
• The AUS will analyze the data inputted by the loan officer such as the credit report, 1003 mortgage application, asset, liabilities, public records, property information, and all other pertinent data and render an automated decision in a matter of seconds

Approve/Eligible Versus Refer/Eligible AUS Findings And FHA DTI Manual Underwriting

The three findings rendered by the AUS are the following:

1. Approve/Eligible: This automated findings means the borrower has an automated underwriting system approval
2. Refer/Eligible: This means that the automated findings cannot render an automated approval and needs a human mortgage underwriter to analyze and review the mortgage file via manual underwriting
3. Refer With Caution: This means the AUS has denied the loan application due to the borrower not meeting the loan programs mortgage guidelines

What Are HUD DTI guidelines On Manual Underwriting

There are cases where an FHA mortgage loan application cannot get approved/eligible per the automated underwriting system and will get referred/eligible per the automated underwriting system. A approved/eligible per the automated underwriting system is an automated approval. Dale Elenteny, a senior mortgage loan originator at Mortgage Lenders for Bad Credit, says the following about HUD DTI guidelines on manual underwriting:

A referred/eligible per automated underwriting system means that the automated underwriting system cannot render an automated approval but the file is eligible for an FHA loan approval if it is done with manual underwriting.

Manual underwriting is when a mortgage underwriter needs to manually underwrite the mortgage loan file. The underwriter will carefully look at the borrower’s credit, credit history, credit scores, past collection accounts, public records, income, liabilities, and assets. The mortgage underwriter will look at the risk level of the file. One of the things that the underwriter will be looking for is compensating factors.

Importance Of Compensating Factors On Manual Underwriting

Compensating factors are positive factors that strengthen the borrower, such as the following:

• borrower having assets such as reserves
• larger down payment
• verification of rent
• other income that is not used in income qualification
• longevity in field
• working in fields such as the medical industry or having government jobs

Manual Underwriting

HUD DTI guidelines on manual underwriting are at the discretion of the mortgage underwriter. I have gotten many FHA manual underwriting files approved and cleared to close by our mortgage loan underwriters with debt-to-income ratios of up to 50%. This is due to the borrower having strong compensating factors

All manual underwriting files require verification of rent, often referred to as VOR. Verification Of Rent is when a renter pays their rent payment with a check for the past 12 months.

Needs to provide 12 months of canceled checks and/or 12 months of bank statements showing the rental payments being transferred from the renter’s bank account to the landlord’s bank account. No late payments on rental payments are allowed for the past 12 months for the verification of rent to be valid.

Why Do Lenders Have Different HUD DTI Guidelines on FHA Loans

Homebuyers with high debt-to-income ratios who are shopping for a mortgage, may encounter that most lenders have different DTI requirements. The reason is due to mortgage lender overlays on debt-to-income ratios. There are two different categories of HUD DTI guidelines. There is the actual FHA minimum debt-to-income ratio requirement, which is 56.9% DTI. There are the individual mortgage lender’s debt-to-income ratio requirements, which are called the mortgage overlays or additional requirements on top of the minimum federal debt-to-income ratio requirements, which is the lender overlay on DTI.  John Strange, a senior mortgage loan originator at Mortgage Lenders for Bad Credit, says the following about choosing a lender with no lender overlays on debt-to-income ratios:

Most banks have HUD DTI guidelines of 45%. Most mortgage lenders will cap the HUD DTI guidelines at 50%. Borrowers with higher debt-to-income ratios need to go as high as a 56.9% debt-to-income ratio in order to qualify for an FHA loan; they would need an FHA mortgage lender like us with no lender overlays on FHA debt-to-income ratios.

We do not have any overlays on debt-to-income ratios or any other lender overlays on FHA loans. If you have a high debt-to-income ratio or need an FHA lender with no lender overlays, please contact us at Mortgage Lenders for Bad Credit at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.