The FHA loan is known for its easy to qualify for guidelines, but exactly what are those guidelines when it comes to the debt ratio? How do you know what gets included and does not get included? Here are some general rules regarding how the FHA looks at various types of debt when you apply for FHA financing.
Student loans always get included in your debt ratio – even deferred student loans. This means that if you just graduated college and do not yet owe money on your student loans and are ready to purchase a home, the lender will include your future student loan payments in your debt ratio. This helps the lender know that even when your student loan payments become due, you will still be able to make your mortgage payments without a problem. If there is not a minimum payment reporting on your credit report and the issuer of the loan is not able to provide a minimum payment, the lender will use 2 percent of the loan amount that is outstanding for your minimum payment.
Debt that is Almost Paid Off
If you have debts reporting on your credit report that are not revolving and are almost paid off, you might be able to exclude them from your debt ratio for an FHA loan. You have to have less than 10 months left on the debt in order to qualify for this exception. The remaining 10 months have to be a natural progression of the loan rather than you making a large payment towards the loan to bring the balance down. In other words, your credit report needs to show that there are 10 or fewer months remaining. This debt cannot be one that can be revived, however. This means it does not work on lines of credit or credit cards – strictly installment debts with a closed end.
If you were a co-signer for someone and now you want to qualify for your own FHA loan, you will likely have to include that co-signed debt into your debt ratio unless you can do one of the following:
- Prove that the person you co-signed for has made all of the payments on the loan. This should be done with canceled checks from the original borrower.
- You must be able to prove that the borrower made the last 12 payments. If the debt is not old enough to have 12 payments made, at least 3 payments must be used. If there are not at least 3 payments, the debt gets included in your debt ratio.
Have the person you co-signed for refinance the loan into his name only and then provide the proof that you are no longer liable for the loan to the FHA lender.
All Other Monthly Debts
Any other debts that report on your credit report get included in the debt ratio for an FHA loan. This includes things like:
- Credit card payments
- Installment loans
- Student loans
Payments that you might not have to include are things like your insurance and utility payments because they do not report to the credit bureaus. Basically, any debtor that reports your debt to the credit bureaus gets included unless you have less than 10 months left to pay on the debt. In addition, your new principal, interest, homeowner’s insurance, taxes, and mortgage insurance premium also get figured in to determine your total debt ratio.
Before you apply for an FHA loan, it pays to get your debt ratio in line. If you are unsure about how the lender will calculate your income because you do not receive a straightforward salary, you can talk to a lender to see what they will do. Typically, they take a two-year average of your income based on your income taxes filed for the last two years. Once you know where your debt ratio lies, you can determine if you need to make any changes before applying in order to get the most affordable rate and best terms on your mortgage.