What Debt-To-Income Ratio Do You Need For An FHA vs Conventional Loan?

Debt-To-Income Requirements For FHA And Conventional Loans

Conventional: 45% DTI
FHA: 56.9% DTI

Here's more detail:

For a conventional loan, you can have a debt-to-income, or DTI, up to 50%, but 43-45% is a more realistic cutoff for most applicants.

FHA allows DTIs of up to 56.9% with strong compensating factors.

For either loan, there is more to approval than meeting DTI standards. But here’s how you can better qualify for each loan despite a high DTI.

What is DTI exactly?

Your debt-to-income ratio is a comparison of your monthly gross income and monthly debt payments. The formula is:

Total monthly housing + debt payments / gross monthly income = DTI

For instance,

$2,000 future housing payment + $1,000 debt payments / $10,000 gross income = $3,000 / $10,000 = 30% DTI.

Nearly every mortgage type uses your debt-to-income ratio as an approval factor. The lower your DTI, the better your chances of approval.

There are also two types of DTIs.

Front-end DTI

Front-end DTI is the comparison between your full future housing payment versus your income. It includes your new principal, interest, taxes, homeowners insurance, and HOA dues, if any.

Back-end DTI

Back-end DTI is the total of your housing payment plus all debt payments versus your income. Most online information and articles refer to back-end DTI.

Debt payments include auto loans, student loans, credit card minimum payments, and even accounts for which no payment is due until a later date.

Good to know for those with zero debt: Many loan types have a maximum front-end DTI as well as a maximum back-end DTI. So if you have zero debt, you may not be eligible for the maximum back-end DTI. For example, you have $6,000 per month in income. You may be capped at a $2,400 payment, or a 40% front-end DTI.

Is FHA or Conventional Better For High DTIs?

FHA is hands-down the better loan for high DTIs, allowing a 56.9% back-end DTI versus conventional’s typical 45%.

Both loans may require compensating factors like good credit or cash reserves to qualify at these DTI levels, but FHA is still more lenient overall.

What Is a “Good” DTI?

There’s no single agreed-upon DTI that is recommended for everyone. Traditionally, some programs recommended a 36% back-end DTI; many financial advisors and experts echo this recommendation.

Some financial gurus go even further saying that your housing expense (front-end ratio) shouldn’t be more than 25% of your take-home pay, which is even more restrictive than using gross income.

But many of these recommendations aren’t based on reality. In many markets, a DTI below 40% is nearly impossible because home prices have outpaced incomes for decades.

It’s not “bad” to have a high DTI if you budget well and avoid relying on credit cards in tight months.

Many people face three major DTI challenges when buying a home.

1. Lower income

2. High debt

3. High home price, causing a large payment

Programs like FHA can help people qualify even without the “perfect” DTI level.

How To Improve Your DTI

There are just two sides of the DTI equation.

1. Income

2. Monthly payments

Some ideas to improve your DTI are:

Increase income

• Ask for a raise

• Find a higher-paying job

• Add an applicant to the loan

• Show the lender two years’ history of receiving overtime, bonus, or other variable income

Note that a second job or newly-started side gig won’t typically help you qualify. You need two years of history of working two jobs to use both incomes.

Reduce Monthly Payments

• Sell a car or other asset to eliminate the payment

• Refinance a car loan

• Pay cash for purchases instead of taking on a payment or charging to a credit card

• Eliminate credit card debt

• Refinance or consolidate student loan debt

• Find a home with lower property taxes and no HOA dues

• Make a larger down payment

Use FHA To Afford The Same Home As Higher-Income Buyers

FHA is a great tool if you’re struggling to afford a home.

In this table, you can see how someone with a moderate income can afford the same home as a higher-income conventional buyer, thanks to FHA.

Buyer 2 would not qualify using conventional, since their DTI is above 50%. But if they had decent credit and some cash reserves, they could very well qualify for an FHA loan.

FAQ

Is gross income used to calculate DTI?

Yes. Mortgage lenders use your gross income, not take-home pay, to calculate DTI.

Is alimony or child support factored into DTI?

Yes. If you have to pay separate maintenance after a divorce, that cost is added to your monthly debts and adds to your DTI. If you receive alimony or child support, you can choose to disclose that income, which reduces your DTI.

Is DTI calculated the same way for both FHA and conventional loans?

Yes, both FHA and conventional use the same calculation for DTI. However, you may receive a slightly different DTI using one program or another, since your mortgage rate, down payment, and mortgage insurance will vary. These are all part of the DTI calculation.

Which Program Should You Choose Based On DTI?

If you are under a 45% DTI, you may qualify for FHA and conventional. Compare the two options side by side to see which one comes with less cost and more benefits.

If you just qualify for one program based on DTI, then that is a win also. You may be able to own a home despite common DTI challenges, thanks to FHA.