The debt ratio is a simple calculation. The monthly debt obligations are divided by the monthly income. For example, if the monthly debt is $1,000 and the monthly income is $5,000, the debt ratio would be 20%.
The FHA uses the applicant's credit score to determine the maximum debt ratio. Applicants with a credit score of 500 to 579 are permitted to have a debt ratio of 43% by the FHA ($5,000 X 43% = $2,150 monthly debt).
An applicant with a credit score above 580 can possibly have a debt ratio as high as 50%!
Now for the bad news, just because the FHA permits low credit scores and high debt to income doesn't mean that there is an approval waiting for the credit challenged borrower. The FHA establishes general guidelines for the borrower and lenders, however, it's the lender that provides the mortgage money, not the FHA. The FHA only "insures" the loan. This means that if the borrower defaults on the loan, the FHA will reimburse the lender a percentage of the loss. Therefore, lenders are permitted to exceed the maximum debt to income ratios established by the FHA.
The debt ratio is known as the "back end ratio".
FHA Monthly Payment Ratio
In addition to the monthly debt to income calculation, the borrower must be below the monthly payment ratio limit. Lenders call this measurement the front end ratio.
The monthly payment includes the principal and interest payment, 1/12 real estate taxes and homeowners insurance, monthly FHA mortgage insurance and any other required payment (i.e. flood insurance).
Read more: http://www.anytimeestimate.com/FHA/debt-to-income-ratio.htm
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