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How does your participating FHA lender decide to approve or deny your FHA mortgage loan? It doesn’t matter if you are applying for a construction loan, refinancing, or buying an existing home. Lenders must follow certain steps to determine your creditworthiness.

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FHA.com is a privately owned website, is not a government agency, and does not make loans.

Approving Your FHA Home Loan: Debt Issues

May 15, 2018

Approving Your FHA Home Loan: Debt Issues
How does your participating FHA lender decide to approve or deny your FHA mortgage loan? It doesn’t matter if you are applying for a One Time Close construction loan, buying a manufactured home, or applying for any other type of new purchase loan; the lender must follow certain steps to determine your creditworthiness.

The lender must insure that all applicants are financially qualified to borrow, which means being able to afford both existing monthly financial obligations AND the mortgage loan. To do this, FHA loan guidelines dictate a certain debt-to-income ratio (DTI) that is acceptable for loan approval.

In the simplest possible terms, if the borrower’s income is taken up by too much outgoing debt, it may be a bad risk for the lender to approve that loan unless there are compensating factors. A bigger down payment is one such compensating factor; your lender may have other options or requirements where applicable.

HUD 4000.1, the FHA loan rulebook, tells the lender that she, “must determine the Borrower’s monthly liabilities by reviewing all debts listed on the credit report, Uniform Residential Loan Application (URLA), and required documentation.”

When reviewing these liabilities, the rules say all “applicable” debts must be included. FHA loan rules tell us, “Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower’s gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement.”

And what about potential debt? A borrower who is listed on a friend or family member’s credit account may be included in the debt-to-income ratio, “unless the Mortgagee can document that the primary account holder has made all required payments on the account for the previous 12 months.”

In cases where less than three payments have been required on the account in the previous 12 months, “the payment amount must be included in the Borrower’s DTI.”

Such requirements make it necessary for a borrower to take a close look at their credit use long before applying for a home loan to determine if there are accounts that should be closed, paid down, or brought current. It’s best to begin working on these issues as soon as you know you want to pursue a home loan.

In addition to these FHA loan rules, there may be additional requirements depending on the lender. Your lender’s rules may go above and beyond what is mentioned here, so it’s a good idea to discuss any questions or concerns with your loan officer.

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