Second Step to Buying A Home- DTI (Debt to Income) Ratio
Posted by Sheree McCool-Fanestiel
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Today we are going to discuss Step 2 in preparing to buy a home.
Step 1- check your credit is found in an earlier post.
What is Step 2?
Figuring your Debt to Income ratio (DTI). Like many other potential homebuyers, you have no idea what is going on when the call comes with the news that your DTI is too high.
Generally speaking, with an FHA loan (from their site):
FHA loan requirements include a maximum debt-to-income ratio. When a borrower applies for an FHA mortgage, they are required to disclose all debts, open lines of credit, and all possible approved sources of regular income. Using this data, the bank and the FHA calculate the borrowers debt-to-income ratio.
How much can that ratio be? 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. In many cases the borrower gets only 28% of the income to put toward housing, and 36% of the income to put towards housing expenses and other debts.
The FHA, or Federal Housing Administration, provides mortgage insurance on loans made by FHA-approved lenders. FHA insures these loans on single family and multi-family homes in the United States and its territories. It is the largest insurer of residential mortgages in the world, insuring tens of millions of properties since 1934 when it was created.
As mentioned in the previous article, good credit, income, and steady employment are important.
With a FICO® score of at least 580, 3.5% down payment will be required. The FICO® score running between 500 and 579 = 10% down payment could be required.
MIP (Mortgage Insurance Premium ) is required on an FHA loan. The home must be the borrowers primary residence.
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Disclaimer: The views and opinions expressed in this blog are those of the author and do not necessarily reflect the official policy or position of the HRIS.
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