Qualifying Ratios and Interest Rates

FHA loans generally offer more lenient qualifying ratios than conventional loans. To ensure affordability, lenders calculate two ratios: the Housing Expense Ratio (HER) and the Total Obligations Ratio (TOR). The HER, which covers housing costs, generally should not exceed 31% of the borrower's gross monthly income. The TOR, which includes housing plus other debts, generally should not exceed 43%. While these are the standard benchmarks, borrowers with strong compensating factors (like cash reserves) can sometimes get approved with higher ratios. The interest rate on these loans is not set by the government but fluctuates with the market; however, because the loan is insured, the rates are often very competitive.