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No matter what kind of mortgage you need, you should set aside some time in the early stages of your loan planning. review the last 12 months of credit and loan repayment history and have a good look at your debt-to-income ratio.

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

How Much Debt Is Too Much for Home Loan Approval?

June 11, 2020

How Much Debt Is Too Much for Home Loan Approval?
FHA mortgages offer much for both first-time buyers and repeat borrowers who are ready to apply and there are many choices for those who need new purchase loans, One-Time Close construction loans, even cash-out FHA refinance loans, and Streamline refinance options when the time is right.

No matter what kind of loan you need, for best results you should set aside some time in the early stages of your loan planning; review the last 12 months of credit and loan repayment history and have a good look at your debt-to-income ratio. A crucial part of all this is your own personal credit report review. It is vitally important to do this before the lender does. Why?
 
  • You should never apply for a loan without knowing what your lender will see in your credit report.
  • You may have identity theft problems reflected in your report that need contesting before you apply for a mortgage.
  • You may have outdated information that hasn’t fallen off your credit report that could hurt your chances at a loan application.
  • Your debt ratio is very important, but it’s part of a larger picture your lender will see when reviewing your credit report.
DTI is a fairly simple calculation your lender makes by taking your verifiable income compared to the amount of your monthly financial obligations. This ratio is calculated with and without your mortgage payment. This is done in order to ensure a borrower can realistically afford the mortgage payment.

The home loan rules for adding up your debt and income information to determine what your debt load is instruct your loan officer as follows:

"The Mortgagee must review all credit report inquiries to ensure that all debts, including any new debt payments resulting from material inquiries listed on the credit report, are used to calculate the debt ratios. The Mortgagee must also determine that any recent debts were not incurred to obtain any part of the Borrower’s required funds to close on the Property being purchased."

What does the term, "material inquiries" mean? "Material Inquiries refer to inquiries which may potentially result in obligations incurred by the Borrower for other Mortgages, auto loans, leases, or other Installment Loans. Inquiries from department stores, credit bureaus, and insurance companies are not considered material inquiries."

How does a participating FHA loan officer acquire this debt information; HUD 4000.1 explains, "The Mortgagee must determine the Borrower’s monthly liabilities by reviewing all debts listed on the credit report, Uniform Residential Loan Application (URLA), and required documentation. All applicable monthly liabilities must be included in the qualifying ratio."

This is why it’s important to avoid opening new lines of credit in the 12 months or so leading up to a home loan application, and instead work hard to reduce existing debt.

If you need help preparing your finances or credit for a new home loan, consider signing up for credit monitoring to track and manage your scores, and you can always call the FHA directly at the agency’s toll-free number (1-800-CALL-FHA) to request a referral to a HUD-approved housing counselor.

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