FHA debt-to-income ratio plus formula
If you are in the market for a mortgage—particularly of the Federal Housing Administration (FHA) variety—you’ll want to be aware of more than just your credit score.
Another important metric is the FHA debt-to-income ratio, and it can make or break the American dream.
Before any mortgage lender approves a loan, they need to know how much income is going toward bills. And the way they come to this determination is through the debt-to-income ratio for an FHA loan.
As of the third quarter of 2022, Hawaii had the weakest average debt-to-income ratio of all U.S. states, followed by Idaho, according to Federal Reserve data. In those states, for every $1 of income, residents had $2.26 and $2.07 in debt, respectively.
Ideally, your FHA debt-to-income ratio should be in the ballpark of 36%, but that's not a hard fast rule and there are exceptions.
Keep reading to learn the debt-to-income ratio formula and ways to keep yours in tip-top shape.
Debt-to-income ratio explained
A consumer’s debt-to-income ratio is expressed as a percentage. It’s a ratio that reflects how much money a potential borrower is obligated to pay toward debt compared with their income.
The purpose of a debt-to-income ratio for an FHA loan is two pronged: to protect both the lender and the borrower.
For the lender, this metric is designed to help assess whether the borrower can afford the monthly mortgage payment and will not end up in foreclosure.
In the case of the borrower, the FHA loan debt-to-income ratio is meant to protect you from getting in over your head and potentially losing your home down the road.
When it comes to credit scores, the higher the number the better. But FHA debt-to-income ratios are the opposite – you’ll want to strive for a lower number. This is because your debt-to-income ratio for an FHA loan illustrates your debt load vs. your income.
To a lender, the less debt you’ve got relative to your income, the better.
To have a shot at a loan that’s insured by the Federal Housing Administration, you should strive for an FHA debt-to-income ratio of less than 43%. The lower the ratio, the more inclined a lender will be to approve your mortgage application.
But that ratio is not set in stone, and some lenders will show more leniency than others.
For example, if there are other factors that offset the risk that the lender is inheriting, they may be willing to accept an FHA debt-to-income ratio in the mid-50-percentage range. Conditions may include a borrower making a higher down payment, or having a large savings or net worth.
Plus, if you expect your expenses will decrease during the term of the mortgage loan, an FHA lender might be able to work with a higher debt-to-income ratio.
If you’re going for a HUD loan (Department of Housing and Urban Development), you’ll want to have an FHA debt-to-income ratio in the ballpark of 31% based on your housing-related cost and 43% based on a broader snapshot of your expenses.
These are also known as front-end and back-end debt-to-income ratios. We'll get into those in more detail below.
To determine your FHA debt-to-income ratio, tally up your minimum monthly payments for those bills that show up on your credit report.
Divide that number by your monthly income before taxes, aka your gross income. Then multiply that result by 100 for the percentage.
Some of the bills that should be included in your calculation include:
Your house payment Homeowners association dues Property taxesCar loanCredit cards (minimum payments due) Personal loans Child support Student loan (depending on whether this shows up on your credit report)
You can leave out the electric bill, retirement plan investments, healthcare, etc.
Debt-to-income ratio types
There are two different types of debt-to-income ratio for an FHA loan, including the front end and back end.
Front end: The front-end debt-to-income ratio is a reflection of how much money you spend on housing each month in comparison to your earnings.
For this result, limit the calculation to include housing-related expenses including a rent or mortgage payment, property taxes, insurance, and any HOA fees. This version is usually most relevant for government-backed mortgage loans.
Back end: The back-end debt-to-income ratio is more common among lenders. This version is a broader representation of your expenses and includes those bills previously mentioned in the calculation.
Here’s an example of an FHA loan debt-to-income ratio:
Let’s say you currently have a housing payment of $1,500, plus $230 for a car loan and $400 per month in credit card bills. This gives us a combined total of $2,130 toward debt.
Now let’s assume you earn a monthly income before taxes of $6,200. Your FHA debt-to-income ratio is 34%, within the desired range of FHA lenders and therefore your chances of getting approved for a mortgage are favorable.
However, let’s say that you are seeking a mortgage in the amount of $400,000 at an interest rate of 6%. Your mortgage payment would then be in the ballpark of $2,400.
By including this amount in your expenses, your debt-to-income ratio for an FHA loan jumps to approximately 48%. In this situation, lenders might not be willing to approve the full amount that you were hoping for.
Ways to reduce to debt-to-income ratio
If you find that your FHA debt-to-income ratio will be deemed too risky by lenders, there are a couple of strategies you can take to lower it. Basically, it comes down to either paying off more of your debt or bolstering your income.
If you decide to tackle your debt first, you’ll want to start by paying more than just the minimum amount due on your balances.
Also, refrain from opening any more credit cards. And, of course, keep making those payments on your existing cards so your debt will shrink relative to your income.
With the gig economy alive and well, you might also want to consider getting a side hustle that will increase your monthly income.
Whichever tactic you choose, you should begin to see your debt-to-income ratio for an FHA loan improve, thereby increasing your chances of getting approved for a mortgage.