FHA Loans:  29/41

 

. 

The FHA (Federal Housing Administration) does not make loans; it insures loans.  The agency insures loans so that if a buyer defaults on a loan, the lender will be paid. 

 

FHA loan ratios (29/41) are typically more lenient, allowing a slightly higher debt load for both housing expenses (PITI) and recurring (long-term) debt. 

 

Unlike Conventional loan that may typically require 10% down payment, FHA loans may require as little as 3% down payment.  There are, however, maximum FHA-insured loan amount limits for residential properties, which vary by location.  Borrowers also pay two mortgage insurance premiums (MIPs): 

 

• Up front premium (UFMIP)
• Mortgage insurance premium (MIP)  

 

In the qualifying ratio, the first number (29%) is your “housing expense” ratio.  It is the maximum percentage of your monthly gross income that the lender allows for your total housing expenses.  These expenses include:

 

• Loan principal and interest (PI)
• Mortgage insurance premium (MIP)
• Hazard insurance
• Property taxes
• Homeowner association dues

 

With the exception of homeowner association dues, the other expenses are commonly referred to as PITI.     

 

The second number (41%), your “total obligations” ratio, is the maximum percentage of your monthly gross income that the lender allows for your housing expenses plus your recurring (long-term) debt.  Recurring debt includes:

 

• Credit card payments
• Child support
• Car loans
• Other obligations that will not be paid off within 6 to 10 months 

 

FHA qualifying ratios are calculated as follows:

 

Divide your annual gross income by 12 

Example:  $48,000 ÷ 12 = $4,000 per month gross income

 

Multiply your monthly gross income by .29

Example:  $4,000 x .29 =  $1,160 per month maximum allowed for housing expenses  (PITI)

 

Multiply your monthly gross income by .41

Example:  $4,000 x .41 =  $1,640 per month maximum allowed for housing expenses (PITI), plus recurring debt