Debt-to-Income and FHA

As a consumer housing advocate, I teach on home ownership often. When consumers are preparing to purchase a home they think about where they want to live, the type of house they was whether it is pre-existing or building, even the school system in the neighborhood and the distance from their job. Granted, those are very good requirements that all consumers should consider, but I say to you there are even more items you should consider.

Purchasing a house is a major purchase and should not be taken lightly. Do not choose a house based on keeping up with the Jones’s, relatives or friends that have a certain type of house that you like. I recommend that you do not even purchase more house than you can afford. Maybe you are reading this and asking yourself, what do I mean by that? There are people that purchase homes and then they cannot afford to furnish the house. You probably know what I am talking about now, you drive by the house and there are no window treatments and you can see all in the house. Do not misunderstand because when we moved into our homes both times we took our time with furnishing our home and did it without incurring extraneous debt. We made the choice and paid for all of our furnishing with cash and on our own schedule not anyone else’s.

When you are not educated with good information you can make the mistake of overbuying. What that says to me is that you are not aware of your finances down to income and expenses. A very crucial item that you need to sit down and factor out is what your debt-to-income ratio is. I strongly advise that you figure this out even before you start looking for a house.

Let me define for you what debt to income ratio means and then elaborate on how it pertains to FHA if you are considering getting an FHA loan. Debt-to-income ratio is the percentage of a consumer’s monthly gross income that goes toward paying debts. Remember, gross income is a person’s income before all deductions. The debt-to-income ratio can include certain taxes, fees and insurance premiums. This is what lenders look at to determine what percentage of your income is available for a mortgage payment after all continuing obligations are met.

Therefore, if you are applying for an <a href=””>FHA loan</a> and are not sure what their debt-to-income ratio is let me share with you. After doing much research, I found out that the FHA has a 29/41 rule which means this:

Gross monthly income times 29 percent equals the amount that can be applied towards housing

Gross monthly income times 41 percent equals the amount that can be applied towards recurring debt and housing expenses.

This formula all in itself can help you decide if you are in a financial position for home ownership. Use this formula as an educational tool that can help you in the home buying process.

Dr. Taffy Wagner

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