Lenders compare your monthly obligations to your earnings to help determine how much of a housing payment you can reasonably afford. The guidelines regarding these calculations, known as debt-to-income ratios, or DTI, vary among lenders and loan types. The Federal Housing Administration, which insures loans for borrowers of modest means, offers relatively flexible guidelines. The maximum qualifying ratios depend on your overall financial picture and the presence of compensating factors.
The front-end DTI ratio represents the relationship between a new housing expense and your gross monthly income. The FHA has a benchmark front-end ratio of 31 percent. Your new housing payment, including principal, interest, property taxes, homeowners insurance and mortgage insurance, commonly referred to as PITI, may not exceed 31 percent of your gross income. FHA-insured loans require a mortgage insurance premium, a fee the FHA uses to pay lender claims when borrowers default. The homeowners association fee also is included in the PITI of the front-end ratio when the property is located in an HOA.
The back-end DTI ratio compares your total monthly obligations, including the new housing payment, to your gross monthly income. The FHA has a benchmark back-end ratio of 43 percent. Monthly liabilities calculated in the DTI include: auto loans; student loans; personal loans; revolving credit card debt; child support and alimony payments. Typically, the minimum payment on active accounts reflected on your credit report count as part of the back-end DTI ratio.
Your DTI ratios may exceed the FHA's benchmarks if you document certain compensating factors that reassure the lender you can afford the monthly payment. Compensating factors that justify higher DTI ratios include: a proven ability to make a housing payment for the past one to two years that equals or exceeds your new housing payment; a down payment of more than 10 percent; accumulated savings; and, conservative spending behavior. A credit history that shows you can "devote a greater portion of income to housing expenses," also qualifies as a compensating factor, according to the Department of Housing and Urban Development. Having at least three months' worth of housing payments saved up also may boost your maximum DTI ratios.
In a community property state, such as California, a non-purchasing spouse's debts must be used when calculating a married person's DTI ratios. This is because property and debts acquired during marriage become the responsibility of both spouses. Therefore, the FHA counts such debts as belonging to the borrowing spouse.