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Your debt to income ratio is a very important factor in the FHA loan application process. Do you wonder how existing debts affect your chances? What about debts that are scheduled to be paid off at some point in the near future?

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FHA Loan Articles

News and Updates for Homeowners

FHA Debt Ratios and FHA Loan Approval

July 7, 2015 - Your debt to income ratio is a very important factor in the FHA loan application process. Do you wonder how existing debts affect your chances? What about debts that are scheduled to be paid off at some point in the near future?

The FHA loan rulebook has a lot to say about a potential borrower’s overall financial fitness for a new home loan. And while the reference book may be changing soon--the FHA and HUD are preparing to transition to a new FHA loan rulebook called HUD 4001.1--the previous references still apply until late 2015. At the time of this writing, Chapter Four of the FHA loan rulebook includes a section how the lender is to analyze the borrower’s credit, including how your existing debt factors into the decision to approve or deny a home loan application:

“When analyzing a borrower’s credit history, the underwriter must examine the overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments.”

Your overall pattern of financial activity is the key, but recent activity can also play an important part. There are two areas the lender may pay special attention to, depending on circumstances. One is recent debts prior to the FHA loan application. On this subject, FHA loan rules instruct the lender:

“Lenders must determine the purpose of any recent debts, as the borrower may have incurred the indebtedness to obtain the required cash investment.”

FHA loan rules do not allow the borrower to use certain types of credit for the down payment. Borrowers can only make a down payment from a list of approved sources which include money saved by the borrower.

The nature of your existing debt is also reviewed. Your lender will examine recurring debt, but also future indebtedness such as student loans or other types of lending that may start requiring payments shortly after the loan closes, if not before.

If your “future debt” can be deferred, the lender might have the option of not counting it toward the borrower’s debt to income ratio. But what about debts that could be paid off shortly after the loan closes? Does the borrower get any additional consideration for this type of financial obligation?

FHA loan rules say, “Debts lasting less than ten months must be included if the amount of the debt will affect the borrower’s ability to pay the mortgage during the months immediately after loan closing, especially if the borrower will have limited or no cash assets after loan closing.

Note: Monthly payments on revolving or open-ended accounts, regardless of their balances, are counted as liabilities for qualifying purposes even if the accounts appear likely to be paid off within ten months or less.”

That means it’s very important to know where you stand with your future debt AND your soon-to-be-paid-off loans. Is it possible to eliminate those “almost paid-off” debts before your application is submitted? That can go a long way toward helping your lender approve the new loan.