DTI Requirements and 203k Loans: What You Need to Know
DTI, or debt-to-income ratio, is one of the key metrics that will determine whether a borrower is eligible for an 203k loan. Unlike most other FHA loans, which typically have a 43% maximum debt to income ratio, the FHA allows 203k borrowers to have up to 45% DTI. This gives borrowers a little more wiggle room when it comes to qualifying for this type of loan.
The Two Types of DTI Ratios
DTI comes in two main varieties, front-end DTI and back-end DTI. Back-end DTI incorporates all of a borrower’s recurring debt expenses, such as mortgages, car payments, student loans, personal loans, and credit card debt. In contrast, front-end DTI only incorporates debt expenses directly related to a borrower’s mortgage, including the mortgage payment itself, taxes, and mortgage insurance. Both types of DTI compare the borrower’s relevant debt expenses to the borrower’s monthly income in order to come up with a percentage.
DTI Ratios in Practice
When it comes to determining a borrower’s eligibility for a home loan, most of the emphasis is put on a borrower’s back-end DTI ratio. We mentioned in the beginning of this article that the maximum DTI ratio for FHA 203k loans is 45%. However, lenders can stretch this out to 50% (or even more in some cases), as long as they can provide a reasonable justification to do so. In other situations, however, lenders may decide to be stricter than the FHA, and may wish to lend only to borrowers with a 40% back-end DTI ratio or less.