FHA Raises Qualifying Ratios

The Federal Housing Administration has raised its qualifying ratios by 2 percentage points, effective immediately, for manually underwritten loans.Homebuyers with a maximum payment-to-income ratio of 31% and a debt-to-income ratio of 43% can now qualify for FHA-insured single-family loans. This change reflects recent federal tax cuts, which have increased borrowers' "buying power and disposable income," according to Mortgagee Letter 2005-16, signed by FHA Commissioner John Weicher. Over 50% of FHA loans are manually underwritten. FHA consultant Bud Carter said the FHA probably has already recalibrated its automated underwriting system (TOTAL) to reflect these higher qualifying ratios. The mortgagee letter also informed lenders that the FHA has changed its treatment of child support. In cases where child support will not be taxed, the lender can increase or "gross up" the amount of the payment by 10% to 15% like other nontaxable income. Each of these changes is "designed to enhance homeownership opportunities for low- and moderate-income individuals and families," the FHA letter says.