Acceptable DTI

Unlike manual underwriting, the TOTAL Mortgage Scorecard does not rely on a rigid, published matrix of maximum Debt-to-Income (DTI) ratios. Instead, it utilizes a sophisticated scoring model to evaluate the borrower’s overall credit risk. This assessment includes variables such as the borrower’s credit report, effective income, assets, and the loan-to-value ratio. Consequently, if the Automated Underwriting System (AUS) issues an “Accept/Eligible” recommendation, the DTI ratio is generally considered acceptable, provided the data entered is accurate. However, the lender remains responsible for verifying the integrity of all data—such as income and liabilities—entered into the system to ensure the risk evaluation is valid.

For loans that require manual underwriting—either because they received a “Refer” recommendation from the AUS or were downgraded due to derogatory credit information—the FHA imposes strict benchmark qualifying ratios. The standard maximum limits are a 31 percent Housing Payment-to-Income ratio (PTI) and a 43 percent Total Fixed Payment-to-Income ratio (DTI). The housing payment includes principal, interest, taxes, insurance, and association fees, while the total fixed payment includes the housing payment plus all other recurring monthly debts. To exceed these standard 31/43 benchmarks, the borrower must have a minimum credit score of 580 and document significant compensating factors.

Borrowers with Minimum Decision Credit Scores between 500 and 579 are subject to stricter limitations during manual underwriting. For these borrowers, the maximum qualifying ratios are capped at 31 percent for the housing payment and 43 percent for total debt. Crucially, acceptable compensating factors cannot be used to exceed these ratios for borrowers in this credit score range. This means that regardless of cash reserves or residual income, the 31/43 cap is absolute. The only exception to this rule permits higher ratios (33/45) specifically for properties that meet the standards for Energy Efficient Homes.

Borrowers with credit scores of 580 and above who are manually underwritten have more flexibility if they possess compensating factors. While the standard remains 31/43, these borrowers may qualify for ratios up to 37 percent (housing) and 47 percent (total debt) if they meet at least one compensating factor, such as verified cash reserves or residual income. Furthermore, ratios may increase to 40 percent (housing) and 50 percent (total debt) if the borrower cites two acceptable compensating factors. A ratio of 40/40 is also permissible if the borrower has no discretionary debt, meaning their only open account is the proposed housing payment.

Verified and documented cash reserves are a primary compensating factor that allows borrowers to qualify with higher DTI ratios (up to 40/50). To utilize this factor, the borrower must demonstrate substantial liquid assets remaining after closing. For one- to two-unit properties, the reserves must equal or exceed three months of the total monthly mortgage payment (PITI). For three- to four-unit properties, the requirement increases to six months of total mortgage payments. These reserves must be calculated using the borrower’s total liquid assets minus the total funds required to close, gift funds, and any borrowed funds.

Yes, Residual Income is a powerful compensating factor in manual underwriting. It allows borrowers with credit scores of 580 or higher to qualify for higher DTI ratios (37/47 or 40/50). To use this factor, the lender must calculate the borrower’s total effective income minus all monthly expenses, including taxes and debt. This remaining amount must equal or exceed the applicable residual income requirements established by the Department of Veterans Affairs (VA) for the borrower’s region and family size. By demonstrating they have sufficient money left over for living expenses, borrowers mitigate the risk associated with higher debt ratios.

For the purpose of calculating the DTI ratio in both TOTAL and manual underwriting, lenders must include all student loans, regardless of their payment status (including deferment). If the credit report shows a monthly payment greater than zero, the lender uses that amount. If the credit report indicates a zero payment, or if the actual payment is less than the amount reported, the lender must use either 0.5 percent of the outstanding loan balance or the actual documented payment if it is greater than zero. This ensures a realistic monthly obligation is factored into the borrower’s financial assessment.

Generally, all recurring monthly liabilities must be included in the DTI ratio. However, for manually underwritten loans, installment debts (such as auto loans) may be excluded if they will be paid off within 10 months from the date of closing. This exclusion applies only if the cumulative payments of all such debts are less than or equal to 5 percent of the borrower’s gross monthly income. Importantly, borrowers are prohibited from making a large lump sum payment to pay down the balance solely to meet this 10-month requirement in order to qualify for the mortgage.

A “Minimal Increase in Housing Payment” is an acceptable compensating factor for manually underwritten borrowers with credit scores of 580 or higher seeking to exceed standard DTI limits. To qualify, the new total monthly mortgage payment must not exceed the borrower’s current housing payment (rent or mortgage) by more than $100 or 5 percent, whichever is less. Additionally, the borrower must document a satisfactory 12-month housing payment history with no more than one 30-day late payment. This demonstrates the borrower is already accustomed to managing a housing expense similar to the new mortgage obligation.

Alimony and child support obligations are treated as recurring liabilities and must be included in the borrower’s Total Fixed Payment (DTI) ratio. Lenders must verify the monthly obligation using the final divorce decree, separation agreement, or other legal order. They must also review pay stubs to check for garnishments. However, for alimony specifically, if the borrower’s gross income was already reduced by the alimony amount during the income calculation phase, it should not be counted a second time as a debt. Properly distinguishing between income reduction and debt obligation is essential for an accurate DTI calculation.