Federal Guidelines on Debt-to-Income Ratio for Mortgage

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FHA, the Federal Housing Authority; along with the Federal National Mortgage Association, known as Fannie Mae; and the Federal Home Loan Mortgage Corporation, known as Freddie Mac, all set federal guidelines to qualify for a conventional home loan. One of the most important requirements applies to debt-to-income ratios for home buyers. The front-end ratio, known as the housing expense ratio, includes your housing expenses only: the home's principal, interest, taxes and mortgage insurance. The back-end ratio, also called the debt-to-income ratio, includes all your debt. Housing expenses, car loans, credit cards, student loans, alimony, child support and any other loans count toward this ratio.

Calculating Housing Expense Ratio

Mortgage lenders use certain debt-to-income ratios along with other criteria to determine if home buyers are financially equipped to handle the financial responsibility of purchasing and owning a home. The first, the housing expense ratio, is the percentage of gross income (before tax) paid toward housing expenses, including principal, interest, taxes, mortgage insurance and any homeowner's dues. When you apply for a home loan, to determine your housing expense ratio, the lender adds the monthly costs of these expenses and divides the amount by your monthly gross income. For example, if your house payment will cost $1,000 a month and you earn $5,000 a month, your house expense ratio is 1,000/5,000, or 20 percent.

Calculating DTI

In addition, the lender figures out your true debt-to-income ratio, which includes your housing expense and all your other debt. This debt includes monthly credit card and other loan payments, as well as any monthly child support and alimony payments. The lender takes this monthly debt amount and divides it by your gross income. If you make $5,000 a month and pay $1,000 for housing expenses and $1,000 for other debts, your DTI is 2,000/5,000, or 40 percent. To calculate your DTI, add your housing expense and other monthly debt payments and then divide by the amount of your gross income. Take that number and multiply by 100 to find the percentage of your debt to your income. (Your monthly debt payments)/(Your monthly gross income) = (.xx) X 100 = xx%.

Fannie and Freddie DTI

Fannie Mae and Freddie Mac are Government Sponsored Enterprises that buy "conforming" loans from banks, credit unions and other financial institutions. The loans must meet the rules, including DTI requirements, to be sold to Fannie and Freddie. Both GSEs prefer a front-end ratio or housing expense ratio of 28 percent and a back-end or DTI ratio of 36 percent, but allow some exceptions up to 45 percent on the back-end debt-to-income ratio on a case-by-case basis. If an exception is made by the lender, a written explanation of the justification for the higher limits is included in the file.


The FHA also defines DTI guidelines to ensure that prospective home buyers are in a financial position to purchase a home. To qualify for a loan backed by the FHA, a home buyer must have a housing expense ratio of 31 percent and a DTI of 43 percent. Meeting these guidelines doesn't guarantee you an FHA loan; your lender will also review your credit and employment history before approval.