What is the Highest Allowable Debt-to-Income Ratio for an FHA Loan?

The debt-to-income (DTI) ratio is one of the most important factors lenders consider when reviewing a mortgage application. This ratio shows the percentage of your gross monthly income that goes toward paying debts, including the proposed new mortgage payment.

FHA loans have specific DTI limits set by the Federal Housing Administration (FHA) to qualify borrowers and reduce risk But the FHA does allow for exceptions under certain circumstances

So what is the highest debt-to-income ratio allowed on an FHA mortgage? Here’s a detailed look at FHA DTI guidelines and limits for 2023

Understanding FHA Debt-to-Income Ratios

There are two types of DTI ratios assessed for FHA loans:

Front-end DTI This includes only housing-related debts like your mortgage, property taxes, insurance, and HOA fees

Back-end DTI: Also known as the total debt ratio, this includes all monthly debt payments like credit cards, auto loans, student loans, etc.

The front-end ratio focuses solely on housing costs, while the back-end looks at your entire debt picture.

Standard FHA DTI Limits

The standard DTI limits set by the FHA are:

• Front-end DTI: 31%
• Back-end DTI: 43%

So for example, if your gross monthly income is $5,000, the front-end DTI limit would be:

• Housing costs ÷ Gross monthly income
  • $1,550 ($5,000 x 31%) ÷ $5,000 = 31%

And the back-end DTI limit would be:

• Total monthly debts ÷ Gross monthly income
  • $2,150 ($5,000 x 43%) ÷ $5,000 = 43%

These are the baseline DTI ratios for FHA loan qualification. But there are exceptions.

When Higher DTI Ratios Are Allowed

The FHA does give lenders some flexibility to approve borrowers with DTIs above 31% and 43%.

There must be “compensating factors” to offset the additional risk posed by a high DTI mortgage.

Here are some examples of compensating factors that could allow for a higher DTI on an FHA loan:

• Excellent credit history and scores (typically 700+)
• Significant cash reserves after closing
• Minimal increase in housing payment
• Additional income not reflected in gross monthly income
• Significant residual income

With one or more compensating factor present, the lender may approve a back-end DTI up to 50%.

But that’s not the highest allowable ratio…

The Maximum FHA DTI Ratio

The absolute highest DTI ratio allowed on an FHA mortgage is 56.99%.

For a borrower to qualify at this maximum limit, the lender would need to document:

• Very strong compensating factors (as noted above)
• Manual underwriting was used (not automated)
• The borrower has potential for increased future earnings

In reality, few borrowers actually get approved with a DTI at the upper limit of 56.99%. Most lenders will cap their maximum allowed DTI around 50%.

But technically, 56.99% is the highest DTI for FHA qualification if the lender deems the borrower an acceptable risk.

Why DTI Matters for Mortgage Approval

Limiting the debt-to-income ratio is an important way the FHA controls risk. The higher your DTI, the more stretched your finances are.

A high DTI signals potential trouble managing mortgage payments along with other debts. It leaves little wiggle room in your monthly budget.

That’s why lenders prefer to see DTIs below 43% on FHA loans. Borrowers with lower ratios have more available income to handle unexpected expenses and rising costs.

But the FHA also wants to provide affordable financing options. So they allow for exceptions over 43% DTI with compensating factors as explained above.

How to Check Your Debt-to-Income Ratio

Figuring out your own DTI is easy. Just follow these steps:

1. Document your gross monthly income

Add up all income you receive before taxes and deductions. Use your current earnings.

2. List all monthly debt obligations

Include credit cards, auto, student loans, alimony, child support, and other debts with a monthly payment.

3. Calculate housing costs

For a purchase, use estimated payments for mortgage principal, interest, taxes, insurance and HOA fees.

For a refinance, use your actual current housing payments.

4. Divide debt by income to get DTI

Divide just the housing costs by gross monthly income for front-end DTI.

Divide total monthly debts by gross monthly income for back-end DTI.

This quick DTI check can give you an idea of where your ratios stand before applying for an FHA loan.

Tips for Lowering Your DTI to Qualify

If your DTI is over 43%, here are some tips to improve your ratios:

• Pay down revolving debts like credit cards and lines of credit
• Pay off installment loans with the highest monthly payments first
• Make extra mortgage principal payments to lower payment on a refinance
• Shop for lower homeowners insurance rates
• Increase your income with a second job or side gig
• Remove authorized user accounts boosting your utilization
• Consolidate debt into a new loan with lower payment

Even small improvements to your debt or income can have a noticeable impact on DTI. Doing a little debt restructuring before applying for an FHA loan can help your chances of approval.

The Bottom Line

FHA loans allow for more flexibility on debt-to-income ratios than conventional mortgages. But there are still limits in place to control risk.

The maximum DTI for FHA approval is 56.99%. But most lenders will cap ratios around 50%. Getting approved at the upper limits requires solid compensating factors.

Knowing the FHA DTI guidelines and how lenders assess risk is important for borrowers. This ensures you take the right steps to strengthen your application before applying. And gives you the best shot at an FHA loan approval.

FHA loan applications can be denied due to several factors, including poor credit history, high debt-to-income ratio, and insufficient funds for down payment or closing costs.