FHA Requirements: Debt Guidelines (2024)

FAQs

What are FHA guidelines on paying off debt to qualify? ›

"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."

The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.

According to the FHA official site, "The FHA allows you to use 31% of your income towards housing costs and 43% towards housing expenses and other long-term debt." Those percentages should be examined side-by-side with the debt-to-income requirements of a conventional home loan.

With a loan backed by the Federal Housing Administration (FHA), for example, you can get away with only a 3.5% down payment if your credit score is 580 or higher. But if you have credit card debt that is dragging your credit score down below 580, you'll have to put down at least 10%.

The maximum ratio to qualify is 43%. Please note that the above indicators do not exclusively determine whether or not a candidate will qualify for an FHA loan. Other factors will be considered, including credit history and job stability. This opens in a new window.

Most lenders want a borrower to have a DTI below 43%. With exceptions, your lender may require you to pay off any collections and charge-offs on your credit report. Even if your DTI is within a healthy range, the loan officer may indicate collection items are delaying loan approval.

In 2022, 9.1% of applicants were denied a home-purchase loan, according to data collected under the Home Mortgage Disclosure Act. However, some loan programs have a higher denial rate than others. Here's how it breaks down. Federal Housing Administration loans: 14.4% denial rate.

The FHA's three requirements are that a property must be safe, secure, and structurally sound to qualify for one of their loans. Properties cannot have adverse conditions that might imperil the homeowner, and must meet proper building codes. As a buyer, these standards protect you from buying an unsafe property.

The overall structure of the property must be in good enough condition to keep its occupants safe. This means severe structural damage, leakage, dampness, decay or termite damage can cause the property to fail inspection. In such a case, repairs must be made in order for the FHA loan to move forward.

What's a good debt-to-income ratio? Ideally, your front-end HTI calculation should not exceed 28% when applying for a new loan, such as a mortgage. You should strive to keep your back-end DTI ratio at or below 36%.

What is the general rule an FHA borrower's debt-to-income ratio should not exceed? ›

In other words, your total monthly debts (including future monthly mortgage payments) shouldn't exceed 43% of your pre-tax monthly income if you want to qualify for an FHA loan.

How do I calculate my debt-to-income ratio? To calculate your DTI, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.

Based on FHA requirements, those who have a good credit history demonstrated by a solid track record of timely payments will likely be eligible for a loan. Potential borrowers whose credit history is marred by slow payments, poor financial judgment and delinquent accounts is not a good candidate for loan approval.

FHA First Mortgage

Borrower must have owned property for 12 months AND if encumbered by a mortgage made payments for the last 12 months within the month due.

FHA Collection Guidelines

If a payment arrangement is not available, 5% of the outstanding balance will be used with the debt-to-income calculation. If the debt has been paid in full, the debt will need to be verified that it was satisfied. The debt can be paid at closing with a payoff.

Doesn't erase past credit damage: Settling debt does not remove negative account information from your credit reports. It remains there for seven years. Might not be required by your lender: You don't have to pay off medical debt to qualify for a mortgage.

If you're currently in the market looking to buy a triplex or fourplex with FHA financing, you need to see if the property's rents pass the Self-Sufficiency Test. To be “self-sufficient” means that 75% of the property's rents need to cover the monthly payments.

Per HUD charge-off account guidelines, HUD does not require borrowers to pay off outstanding unpaid collection accounts and charge-off accounts.