One of the things mortgage lenders have been very strict with is debt to income ratios. Banks analyze what your monthly housing expense will be vs. your gross (before tax) income and then look at your overall monthly expenses vs. your gross income. This is also known as the front and back end ratios.  Fannie and Freddie, along with most lenders will allow the stretch of these ratios to go up to 50%. However, the FHA is pretty strict with qualifying ratios sticking to a 31 for the housing expense and a 43 to the total monthly debt ratio.

I am sure I have written about ratios before, about a hundred times, so I do not want to repeat myself here. This post is specifically about FHA and how they look at high ratios. The FHA is pretty strict with their 31/43 guidelines. However, they will allow compensating factors to come into play when the ratios are close. I have listed a few key compensating factors the FHA underwriter will look for to allow a loan to be approved.  If you know you are close and want to point some of this stuff out to your mortgage loan officer, sooner is better than later.

·         Have you been paying rent or another mortgage for the past 12 months? The lender will look at if the dollar amount is close to the proposed payment and if you have been current on the payments for at least 12 months. This shows you have the ability to pay the dollar amount in a timely fashion.

·         Have you been able to save enough money that shows you have the ability to do so? They will look to see that you have at least 3 months of housing expense left over after the closing.

·         How much of your gross income is your housing expense? The more the better-Previous credit history shows borrower has the ability to devote a greater portion of income to housing expenses.

·         Did you put down a large down payment of 10% or greater? They love to chat about “skin in the game”!

·         Are you making extra money or have other income that they are not using to qualify the loan, but you still get? Things such a seasonal or second job, child support or public assistance such as food

·         There is a potential for increased earnings, as indicated by job training or education in the borrower’s profession? Teacher, lawyer, dentist?

·         Are you relocating to get a new or better job? Do you have a spouse or co-borrower that will be getting another job? This is called “trailing co-borrower income”. Basically, someone is moving along with you that will be getting a new job too, thus adding more income to post but later on. They will have to show some proof such as they had a job and it will be easy to get a similar job (or one is lined up) in the new town.

The FHA is making tons of changes now with credit, loan to values, seller concessions and other stuff. They are also allowing loans to be provided by third party lenders. So, you need to make sure that whoever is doing your loan, understands your needs and knows how to do an FHA mortgage. Do not just go to any old mortgage broker for your loan and educate yourself even before you speak to someone.