The Application Series - #4 –The Ratios
Front-End Housing Ratio
The FHA maximum allowable front-end housing debt to income (DTI) ratio is 31%. Take the monthly rent payment and divide it by the applicant’s total gross monthly income for a total front-end DTI ratio.
Examples
Applicant A: $850 monthly rent / $2,800 gross monthly income = 30% front-end DTI
Applicant B: $1,250 monthly rent / $3,000 gross monthly income = 42% front-end DTI
Applicant C: $2,000 monthly rent / $7,500 gross monthly income = 27% front-end DTI
Back-End Ratio
The FHA maximum allowable back-end DTI ratio is 41%. This uses the amount of an applicant’s total debt payments, not just the monthly rent amount. Debt payments are any loans, car payments, lines of credit, credit cards, student loans, child support, etc. that the applicant pays monthly. To figure back-end DTI ratio, add up all the monthly payments and the monthly rent amount and divide it by the applicant’s total gross monthly income.
Examples
Applicant A: $850 monthly rent / $2,350 net debt monthly income
$2,800 gross – $200 credit card – $250 car payment
= 36% back-end DTI
Applicant B: $1,250 monthly rent / $2,550 net debt monthly income
$3,000 gross – $450 child support
= 49% back-end DTI
Applicant C: $2,000 monthly rent / $4,340 net debt monthly income
$7,500 gross – $660 car payment 1 – $540 car payment 2 – $1,000 credit card – $620 child support – $340 student loans
= 46% back-end DTI
Which Applicant?
Applicant A is the kind of tenant you are looking for and who will be most likely to pay rent consistently.
Applicant A: $850 monthly rent / $2,800 gross monthly income = 30% front-end DTI
Applicant A: $850 monthly rent / $2,350 net debt monthly income
$2,800 gross – $200 credit card – $250 car payment = 36% back-end DTI
Consistency dictates the approval or denial of an applicant based on ratios. At some point an applicant will try to plead their case and promise they will pay the rent every month. There are no exceptions if you want to avoid collection issues and a fair housing complaint. Just blame the government, it works every time.
The last segment in the Application Series will go over the importance of all other information collected on the application.
