If You Are Buying With FHA and Your Debt Ratios Run High, Read This
If you are buying with an FHA loan and your debt ratios are running high, this one is for you. There is a line in the FHA guideline that speaks to exactly your situation, and most borrowers never hear it.
Meet Valerie
Valerie is a fictional buyer near Southport, NC. She is an illustrative example, not a real client, but her situation comes up often. She pays her bills on time. Every month she has money left over. Yet when the numbers are run on paper, her debt ratios look high. She assumed FHA was out of reach and nearly stopped looking.
That assumption is common. Many buyers see a ratio on a worksheet and conclude the answer is no. But the ratio is not the only thing the guideline lets a file be judged on.
What the FHA guideline says
Here is the text from FHA guideline Section II.A.5.c.ix, word for word:
"FHA does not use residual income tables as a primary qualifying measure. However, residual income may be used as one compensating factor for manual underwriting to justify higher qualifying ratios (up to 37/47 or 40/50). FHA does not provide a specific military reduction to residual income figures."
That is three sentences, and each one matters.
Breaking it down sentence by sentence
The first sentence tells you what residual income is not. It is not a primary qualifying measure in FHA lending, and FHA does not use residual income tables the way some other programs do. If you were hoping that leftover cash alone qualifies a file, that is not what this says.
The second sentence is the part most borrowers never hear. Residual income may be used as one compensating factor for manual underwriting. A compensating factor is something in the file that supports approving higher ratios than would otherwise be accepted. The guideline names the higher ranges: up to 37/47 or 40/50.
The third sentence is a clarification. FHA does not provide a specific military reduction to residual income figures. If you are military, do not expect a special adjustment on this point.
What this means for Valerie
Valerie has steady on-time payments and cash left at the end of each month. Under this guideline, that leftover cash is not ignored. It may be presented as a compensating factor if her file is manually underwritten. That does not mean approval is automatic. Manual underwriting looks at the whole file, and whether a loan works depends on the full picture. But it moves her from a quick no on paper to a real conversation about her file.
That is the kind of path I look for. When a ratio looks high, I do not stop at the ratio. I ask whether the file can be manually underwritten and whether residual income can support it.
The question to ask your loan officer
Here is the one thing you can do today. Ask your loan officer:
"Can my file be manually underwritten, and can my residual income be used as a compensating factor under FHA guideline Section II.A.5.c.ix?"
Then ask them to show you where residual income is documented in your file. This second step matters. A compensating factor only helps if it is actually in the file where an underwriter can see it. If your loan officer cannot point to it, you have learned something important before you lose time.
Why the second question matters
It is easy to say a factor exists. It is another thing to see it written down. Asking to be shown keeps the conversation concrete. It also tells you whether your loan officer is willing to look beyond the first number on the page.
Be ready to talk through your monthly picture: what comes in, what goes out, and what is left. Residual income is simply the money left over after your obligations, so a clear view of your own budget helps the conversation.
Keep it in perspective
This guideline is one tool, not a promise. FHA does not treat residual income as a primary measure, and every file is reviewed on its own facts. But if your debt ratios are running high and you have been told FHA is out of reach, it is worth asking before you accept that answer.
I am Jason Sharon, a licensed mortgage broker at Home Loans Inc, and I find the path. If you want me to look at your numbers, call 843-LOW-RATE.
Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
Learn more about this loan program: If You Are Buying With FHA and Your Debt Ratios Run High, Read This
