FHA Debt-to-Income Ratio

FHA Debt-to-Income Ratio Limits

Debt-to-income is where more FHA files are decided than anywhere else. The credit score gets you in the door. The DTI determines whether you can afford the house, and it’s the number that most often needs work.

The two ratios

FHA uses two DTI calculations.

Front-end ratio (housing ratio)

your new total monthly housing payment, divided by your gross monthly income. The housing payment includes principal, interest, property taxes, homeowner’s insurance, FHA mortgage insurance, and any HOA dues.

Back-end ratio (total DTI)

your housing payment plus all other monthly debt obligations, divided by gross monthly income. Other debts include car payments, student loans, credit card minimums, child support, and any other recurring obligation on your credit report.

The published limits

Ratio	Standard Limit	With Compensating Factors
Front-end	31%	Up to 40%
Back-end	43%	Up to 50% with automated approval, higher with strong factors

Those standard limits, 31/43, are the manual underwriting limits. They apply when a file is reviewed by a human underwriter without automated approval, which typically happens when the credit score is under 580 or there’s something in the file that the automated system flags.

What actually happens with most files

Most FHA files run through FHA’s automated underwriting system, called TOTAL Scorecard. When TOTAL returns an approval, it can support back-end ratios well above 43%, commonly up to 50%. Files with strong compensating factors have been approved with ratios approaching 57%.

This is the single most important thing to understand about FHA DTI: the 43% limit is not where most approvals stop. It’s where manual underwriting stops. Automated approvals go higher, and the difference between the two is what makes FHA workable for buyers in expensive markets.

Compensating factors: what moves the number

When a file exceeds the standard ratios, FHA wants to see reasons why it’s still a safe loan. These are the compensating factors that carry weight:

Reserves after closing.

Three months of the total housing payment in savings after the loan closes. This is the strongest single factor. It tells the underwriter you can absorb a bad month.

Minimal payment shock.

If your new housing payment is close to what you’ve been paying in rent, the underwriter knows you’ve already been handling that number. A jump from $1,200 rent to $2,800 mortgage is a bigger concern than $2,400 to $2,800.

Residual income.

What’s left after all debts and the housing payment. FHA has residual income tables by region and family size. Above the threshold is a compensating factor.

Documented history of managing housing costs.

Twelve months of on-time rent or mortgage payments.

Income not counted in qualifying.

Overtime, bonus, or a second job that doesn’t have a two-year history yet, so it can’t be used in the ratio, but it exists and it’s documented.

What does not help: a high credit score on its own. Good credit is expected, not a compensating factor for a high ratio.

How specific debts are counted

Some debts are counted differently than borrowers expect.

Student loans.

If the loan is in deferment or on income-based repayment, FHA uses the actual documented payment if there is one. If the payment is zero or not documented, FHA uses 0.5% of the outstanding balance as the monthly payment for ratio purposes. A $60,000 balance in deferment adds $300 to your monthly debts even though you’re not currently paying anything.

Collections.

Non-medical collections totaling more than $2,000 add 5% of the balance to your monthly debts unless you have a payment plan. Medical collections are excluded.

Installment debt with under 10 months left.

Can generally be excluded if the remaining payments are small relative to income. A car loan with eight payments left may not count.

Child support and alimony.

Counted as debt if you pay it. Counted as income if you receive it and it’s documented and likely to continue for three years.

Co-signed loans.

Counted against you unless you can document 12 months of the other party making the payments.

401(k) loans.

Counted as debt.

Reducing your DTI before you apply

If your ratio is over where it needs to be, the fixes are the obvious ones, but the order matters:

Pay off the smallest installment debt with a monthly payment.

A $3,000 car loan with a $250 payment removes $250 from your ratio. A $3,000 credit card balance with a $90 minimum removes $90. Pay the car.

Get documented payments on collections and student loans.

A payment plan on a $5,000 collection is usually far less per month than the 5% FHA would otherwise count.

Add income.

A co-borrower, or documenting income you weren’t counting.

Lower the purchase price.

Sometimes the answer is a $380,000 house instead of $420,000.

What not to do: close credit accounts. It doesn’t reduce your DTI (the balance is what matters, not the account) and it can hurt your score.

From the underwriting side

Here’s what I’d tell you that the guideline doesn’t. An underwriter looking at a 48% DTI file is asking one question: what happens if something goes wrong? Reserves answer that question. Payment history answers it. A file at 48% with three months in the bank and 24 months of on-time rent at a similar payment is a file I’d approve. A file at 44% with nothing in reserve and a rent history that’s half the new payment is a file I’d send back.

The ratio is a number. The file is a story. Underwriters approve stories.

Frequently asked questions

What's the maximum DTI for an FHA loan?

The standard is 43% back-end. Automated approvals commonly go to 50%. With strong compensating factors, higher ratios have been approved, though 57% is close to the practical ceiling.

Does FHA count my spouse's debt if they're not on the loan?

In community property states, yes. Texas is a community property state; Colorado is not. In Texas, a non-borrowing spouse's debts count in your ratio even if they're not on the loan.

Do I include utilities in my DTI?

No. DTI counts debts that appear on your credit report plus the new housing payment. Utilities, groceries, and insurance premiums other than homeowner's insurance are not included.

What counts as gross income?

Income before taxes. For salaried employees, base salary plus documented overtime, bonus, or commission with a two-year history. For self-employed borrowers, net income from tax returns averaged over two years.

Buying outside Colorado or Texas? Barrett Financial Group originates in 48 states. Get in touch and I’ll connect you with a licensed originator in yours.

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