DTI (Debt-to-Income Ratio) in Relation to FHA 203(b) Loans

203b Financing and Borrower DTI Requirements

If you’re considering taking out a 203b loan to buy a home, your DTI, or debt-to-income ratio, is one of the most important metrics that FHA lenders will look at to determine your eligibility. DTI is calculated by taking a borrower’s monthly debts and dividing them by his or her monthly income. For example a borrower with $2,000 in monthly debt and an income of $5,000 would have a DTI ratio of 40%.

Front-End DTI vs. Back-End DTI

While DTI might sound simple (and, in general, it is), there are actually two kinds of DTI; front-end DTI and back-end DTI. Front end DTI only counts living debt expenses, such as mortgage payments, mortgage insurance, and taxes, against a borrower’s income. Back-end DTI, however, counts most kinds of debt expenses against a borrower’s income when calculating their DTI.

What Types of Payments Count Toward Back-End DTI?

In general, most kinds of recurring debt payments count toward a back-end DTI calculation, including student debt, credit card debt, car loans, and, of course, the mortgage that the potential borrower will be paying. If a borrower is currently paying rent on a property that they will leave when they purchase a home, this will not count toward their back-end DTI.

DTI Requirements for 203b Loans

FHA home loans, including the 203(b) loan, have a maximum allowable front-end DTI of 31%, and a maximum allowance back-end DTI of 43%. These numbers may be subject to exemptions from a lender, as long as they have justification. For example, if a borrower has a back end DTI of 45% but has a perfect credit score and a low amount of overall debt, a lender may make a special exception.

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