2. Debt to Income Ratios

Introduction

This topic contains information on using debt-to-income ratios to qualify a borrower, including

•	general information about debt-to-income ratios

•	mortgage payment expense to effective income ratio, and

•	total fixed payment to effective income ratio.

Change Date

May 10, 2009

4155.1 4.F.2.a General Information About Debt to Income Ratios

Debt to income ratios are used to determine whether the borrower can reasonably be expected to meet the expenses involved in home ownership, and provide for his/her family. In order to make this determination, the lender must complete the following two ratios:

•	the Mortgage Payment Expense to Effective Income ratio, as described in HUD 4155.1 4.F.2.b, and

•	the Total Fixed Payment to Effective Income ratio, as described in HUD 4155.1 4.F.2.c.

Note: For loans to be scored through the TOTAL Scorecard, the debt-to-income ratios must be calculated for entry into the Automated Underwriting System (AUS) to be evaluated by TOTAL.

4155.1 4.F.2.b Mortgage Payment Expense to Effective Income Ratio

The relationship of the mortgage payment to income is considered acceptable if the total mortgage payment does not exceed 31 percent of the gross effective income.

A ratio exceeding 31 percent may be acceptable only if significant compensating factors, as discussed in HUD 4155.1 4.F.3, are documented and recorded on the mortgage credit analysis worksheet. For those borrowers who qualify under FHA's Energy Efficient Homes (EEH), the ratio is set at 33 percent.

For borrowers with limited recurring expense, greater latitude is permissible on the Mortgage Payment Expense to Effective Income ratio, than on the Total Fixed Payment to Effective Income ratio.

Note: The total mortgage payment includes

•	principal and interest

•	escrow deposits for real estate taxes

•	hazard insurance

•	the mortgage insurance premium

•	homeowners' association dues

•	ground rent

•	special assessments, and

•	payments for any acceptable secondary financing.

4155.1 4.F.2.c Total Fixed Payment to Effective Income Ratio

The relationship of total obligations to income is considered acceptable if the total mortgage payment and all recurring charges do not exceed 43 percent of the gross effective income.

A ratio exceeding 43 percent may be acceptable only if significant compensating factors, as discussed in HUD 4155.1 4.F.3, are documented and recorded on the mortgage credit analysis worksheet. For those borrowers who qualify under FHA's EEH, the ratio is set at 45 percent.

4155.1 4.F.2.d Estimating Real Estate Taxes When Determining Debt to Income Ratios

For real estate taxes, lenders must use accurate estimates of monthly property tax escrows when qualifying borrowers. In new construction cases, property tax estimates must be based on the land and completed improvements, not just on the land value.

Reference: For information on projecting and collecting real estate tax payments, see HUD 4155.2 6.A.1.i.