FHA Loans and Debt: What Really Counts for Mortgage Approval?

FHA Loans and Debt – Are you planning to buy a home but feeling uneasy about how debt might affect your mortgage approval? You’re not alone! The process can be confusing, but here’s some good news: certain types of debt don’t count against you when applying for an FHA loan. In this guide, we’ll explore what debts FHA lenders overlook and how knowing this can ease your approval journey.

What is an FHA Loan?

An FHA loan, backed by the Federal Housing Administration, is popular among first-time homebuyers. These loans offer:

• Lower down payment options: often as low as 3.5% of the home’s purchase price.
• Flexible credit requirements: making them more accessible to those with moderate credit scores compared to conventional loans.

However, like any home loan, lenders assess your Debt-to-Income (DTI) ratio closely. The DTI measures the percentage of your monthly income that goes toward debt payments. But here’s where FHA loans differ—some debts simply don’t count against your DTI.

Understanding the DTI Ratio and FHA Loans

A manageable DTI ratio increases your chances of mortgage approval. But for FHA loans, not all debt impacts your DTI. Knowing what counts and what doesn’t can make a significant difference in your approval process and, ultimately, how much house you qualify for.

What Counts as Debt in FHA Loan Applications?

Let’s break down the specific obligations not considered debt under FHA guidelines:

1. Medical Collections

• Medical debt in collections isn’t factored into your DTI ratio.
• FHA acknowledges that medical expenses can be unexpected and shouldn’t hinder your path to homeownership.

2. Current Taxes (Federal, State, and Local)

• Unpaid or delinquent taxes may count, but if you’re current on your taxes, they’re not considered part of your DTI.
• This includes federal, state, and local taxes, as long as no repayment plan is required.

3. Automatic Deductions from Savings

• Any automatic withdrawals you make to a savings account aren’t counted.
• Example: Setting aside money each month into a savings account won’t impact your DTI.

4. Retirement Contributions (e.g., FICA and 401(k))

• Contributions to retirement accounts, like 401(k)s and FICA, don’t count as debt.
• Your efforts to secure your financial future through retirement savings won’t lower your chances of mortgage approval.

5. Collateralized Loans Secured by Depository Accounts

• Loans backed by money in a depository account (such as secured loans against savings) aren’t factored in.
• Using your savings as collateral for a loan won’t count against your DTI ratio.

6. Utilities (Gas, Electric, Water)

• Essential living expenses, such as monthly utility bills, are not considered debt.
• These aren’t included in your debt calculation since they’re seen as standard living costs.

7. Child Care Expenses

• Child care costs are excluded from your DTI assessment.
• Given the high cost of child care, this exclusion can make a significant difference in your qualifying amount.

8. Commuting Costs (Fuel, Parking, Public Transport)

• Transportation costs for your daily commute don’t count as debt.
• This is helpful for buyers with long commutes who might otherwise worry about these costs impacting their DTI.

9. Union Dues

• Regular dues paid to unions aren’t considered debt.
• Memberships in unions won’t affect your mortgage eligibility.

10. Insurance Payments (Excluding Property Insurance)

• Life, health, or vehicle insurance payments are excluded, except for property insurance.
• You can carry these types of insurance without them counting toward your DTI.

11. Open Accounts with Zero Balances

• Accounts like credit cards with zero balances don’t affect your debt load.
• Having a few open accounts with no balance won’t hurt your DTI ratio or approval odds.

12. Voluntary Deductions Not Tied to Obligations

• Charitable contributions or other voluntary paycheck deductions unrelated to obligations won’t count.
• Giving back to the community or electing additional benefits won’t impact your mortgage application.

Why Understanding Exclusions Matters

These FHA exclusions can significantly impact your mortgage qualification. Here’s how understanding these exclusions benefits you as a homebuyer:

• Better Approval Odds: Knowing what doesn’t count against you means you may qualify for a mortgage amount higher than expected.
• Accurate Financial Profile: You can paint a clear picture of your financial situation, focusing on reducing debts that impact your DTI.
• Reduced Stress: With certain obligations like medical collections and utilities excluded, you can focus on paying down high-impact debts like credit cards or personal loans.

Key Takeaway: Focus on the Right Debts

By concentrating on the debts that matter—such as credit cards, personal loans, or other major liabilities—you’re taking steps to enhance your financial profile. This strategic approach makes a big difference when applying for an FHA loan, allowing you to put your best foot forward.

Next Steps: Prepare for Your FHA Loan Application

If you’re considering an FHA loan and have questions about your finances, our team is here to help. We’ll walk you through each step and answer any questions you have. Whether you need help calculating your DTI ratio or advice on which debts to pay down, we’re here to guide you.

Ready to start your homeownership journey? Book a time to chat with us using the link in the description below, and let’s make your home dreams a reality!