Front-end Ratio

• Your front-end ratio compares the amount of your monthly housing costs, which includes your mortgage and private mortgage insurance expenses, to your gross monthly income. An acceptable ratio is 29 percent, meaning your housing costs should not exceed 29 percent of your gross monthly income. Thus, if your gross monthly income is $3,000, your housing costs should be no more than $870. In addition to your income from your job, gross monthly income can also include items such as dividend and interest earnings.
  
  

Back-end Ratio

• Your back-end ratio compares all other monthly debt in relation to your gross monthly income. For an FHA loan, an acceptable back-end level is total monthly debt that does not exceed 41 percent of gross monthly income. Debt includes items such as student loans, car loans, credit card payments, personal loans, child support and alimony payments and federal tax lien repayments. Debt does not include items such as projected utility bills and auto and health insurance.
  
  

Considerations

• Although FHA lenders use the debt ratios as guidelines for loan qualification, they may deviate from them slightly in certain situations. For instance, if you have an excellent credit history or are able to make a larger than the minimum down payment amount normally required for an FHA loan, typically around 3 percent, the lender may agree to raise the limits. As a result, you might be able to purchase a more expensive home.
  
  

Meeting the Guidelines

• If you want to purchase a home but you don't quite meet the FHA debt ratio guidelines, there are some steps you can take to improve your situation. For example, if you're carrying a large amount of credit card debt, focus on paying down your outstanding balance to reduce your minimum required monthly payment. You can also boost your income level by finding a part-time job or obtaining a higher-paying position.