Federal Guidelines on Debt-to-Income Ratio for Mortgage

Federally insured loans have flexible income qualifying guidelines.

Federally insured loans have flexible income qualifying guidelines.

The amount of income you use to pay a mortgage is important in determining whether you'll repay the loan. Congress created the Federal Housing Administration to minimize the risk involved with financing low-income borrowers. As an agency within the Department of Housing and Urban Development, the FHA insures lenders against default. HUD sets flexible guidelines for the amount of debt a borrower can have relative to his income, known as debt-to-income ratios.

Debt-to-Income Ratios

There are two types of Debt-to-Income Ratios that lenders consider when approving you for a loan. DTIs are expressed as percentages. The housing ratio -- also known as the front-end ratio -- compares your monthly housing payment of principal, interest, taxes and insurance to your gross income. The back-end ratio compares your total recurring debt and housing payment to your income. The federal guidelines for mortgage DTI ratios are outlined in the HUD Handbook for FHA loans.


A healthy back-end DTI ratio is 36 percent or less, Bankrate says. Conventional loans generally come with a 28 percent front-end DTI requirement, according to the Federal Reserve Board. The FHA has benchmark guidelines of 31 percent front-end and 43 percent back-end ratios. HUD may revise its guidelines according to its risk-management needs. It also offers additional flexibility for certain programs. For example, the front-end ratio is set at 33 percent for the FHA’s Energy Efficient Homes program, which insures loans for energy-efficient improvements.

Compensating Factors

Federal guidelines allow a borrower to exceed benchmark DTI ratios when certain compensating factors exist. You have to provide documentation that supports your ability to afford a higher-than-usual payment. Acceptable compensating factors include a previous housing payment that is higher than, equal to or minimally lower than the new housing payment. You must have a good track record of making the housing payments on time for one to two years. A large down payment of 10 percent or more and accumulated savings are also compensating factors which allow for a higher DTI ratio.


If you owe more on a conventional home loan than your property is worth, you can refinance using an FHA-insured loan. The FHA Refinance of Borrowers in Negative Equity Positions is even more flexible than other FHA loans. You can qualify with as much as a 35 percent housing DTI ratio and a back-end ratio of 48 percent, according to HUD. The increased DTI ratios apply to refinances beginning in March 2012 and completed by December 31, 2014.


About the Author

K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.

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