Ratios needed to qualify for a mortgage

Housing Expense Ratio – House note (principal, interest taxes, and insurance) as a percentage of gross monthly income.

Conventional loan guidelines    28% max.

FHA loan guidelines    31% max.

VA loan guidelines    not considered

Total Expense Ratio – Total of monthly obligations plus the proposed house note as a percentage of gross monthly income.

Conventional loan guidelines    43% max.

FHA loan guidelines    43% max.

VA loan guidelines    43%

Exceptions are considered on a case-by-case basis and require compensating factors to be considered.

NOTE:  According to HUD, the following is a list of FHA compensating factors that may be used to support loan approval.  Please remember, “Any compensating factor used to justify mortgage approval must be supported by documentation.”

The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage over the past 12 – 24 months.

The borrower makes a large down payment (ten percent or more) toward the purchase of the property.

The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward the use of credit.

Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses.

The borrower receives documented compensation or income not reflected in effective income, but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits.

There is only a minimal increase in the borrower’s housing expense.

The borrower has substantial documented cash reserves (at least three months’ worth) after closing.  In determining if an asset can be included as cash reserves or cash to close, the lender must judge whether or not the asset is liquid or readily convertible to cash and can be done so absent retirement or job termination.  

The borrower has substantial non-taxable income (if no adjustment was made previously in the ratio computations).

The borrower has a potential for increased earnings as indicated by job training or education in the borrower’s profession.

The home is being purchased as a result of the primary wage-earner, and the secondary wage-earner has an established history of employment, is expected to return to work, and reasonable prospects exist for securing employment in a similar occupation in the new area.  The underwriter must document the availability of such possible employment.