mortgage

Fixing 3 common FHA loan snags

Problem: Your debt-to-income ratio is too high
Problem: Your debt-to-income ratio is too high

Debt-to-income ratio is banker language for the amount of income you earn each month, versus the amount you spend each month paying debt such as a mortgage, a car payment or student loans.

The FHA has limits for how high a borrower's debt-to-income ratio can be. In many cases, borrowers who end up spending more than 31 percent of their monthly income on a mortgage payment

Solution: Take a TOTAL approach

If the home you're considering will push you over this limit, ask your lender about running the loan through the FHA's TOTAL automated underwriting system.

As part of this system, approved lenders can enter your information and get an almost instantaneous yea or nay from the FHA. TOTAL often accepts higher debt-to-income ratios than those accepted in a manually underwritten loan, says Matt Hackett, underwriting manager for Equity Now in New York.

TOTAL won't help you if you have red flags on your credit report, such as disputed accounts or a missed mortgage payment, Hackett says. Instead, you'll have to document at least two compensating factors, he says.

Examples of commonly used compensating factors are at least three months' worth of mortgage payments in reserve, a down payment larger than 10 percent or a history of making a large housing payment, according to Hackett.

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