Friday, July 20, 2012

FHA Home Loan Front End and Back End Debt Ratios

Front End Ratio

This is the percentage total proposed monthly payment for your mortgage ( includes principal and interest,taxes,insurance and mortgage insurance if any) divided by Gross Monthly Income.So if your proposed mortgage is 1350 dollars and your gross income is 4500 dollars your front end ratio would be 30%

Back End Ratio

This includes the payment for your proposed mortgage as indicated above and other debt that you may have.Other debt will be explained more in detail later but is normally considered to include your monthly payments on auto,credit cards,student loans,child support etc.So Back end ratio is the percentage of mortgage payments and monthly debt payments divided by Gross Monthly Income.So continuing the above example if the proposed mortgage is 1350 dollars and other monthly payments are 650 dollars per month the back end ratio would be 44.44%

Acceptable Debt Ratios or Ideal Debt Ratios

There is no set guideline but more emphasis is laid on the Back End ratio as compared to your front end ratio.If a proposed borrower is auto approved by DU Desktop underwriter(fannie mae)or LP Loan Prospector (freddie mac) most FHA Home Loan lenders will follow the approval.DU and LP will approve borrowers based on their credit profiles .Generally a 620 + Fico score can be approved for 45% Back end.A slightly better profile can be auto approved upto 50% back end.

If the FICO is below 620 there are a few FHA Home Loan lenders who will approve such borrowers. However the files are manually underwritten and the ratios are more conservative. Generally a front end of 30% and back end of 43 % will be acceptable.

Other Monthly Debt: What to include and Exclude

Credit Cards,Student Loans,Auto Loans,Instalment Loans: The minimum monthly payments as specified in your Bill.

Child Support,Tax Liens: Any contractual monthly payments

If a borrower has cosigned for someone else and can show clear proof( example cancelled checks for 12 months ) to show that the other party has been responsibly making payments ,the liability may be excluded by the FHA Home Loan lender.

Any debt that can be paid of can be excluded .

Any instalment/auto loan payments with less than 10 monthly payments outstanding may also be excluded.

As the other debt keeps reducing the qualification for a mortgage loan keeps increasing.( Keeping in mind that the back end ratio is fixed and not flexible)

We write articles covering a wide range of topics ,on a regular basis , on Loan Qualification.

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