FHA: Structure the Loan, Not Just the Down Payment
A new LO should leave this chapter able to explain the credit/LTV tiers, manual vs AUS ratios, mortgage insurance, seller contributions, cash-to-close and the questions that determine whether FHA fits.
FHA at a Glance
What Front and Back DTI Mean on FHA
Proposed monthly housing expense ÷ gross qualifying monthly income.
Housing normally includes P&I + taxes + hazard/flood + monthly MIP + HOA/other required housing expense.
Proposed housing expense + qualifying monthly liabilities ÷ gross qualifying monthly income.
For manual FHA underwriting, 31/43 is the baseline. FHA permits higher manual ratios in defined circumstances with specified compensating factors. A TOTAL/AUS approval is different: do not teach a single “FHA max DTI” as if every AUS file has the same cap.
Cash-to-Close & Seller Contributions
FHA's 3.5% minimum required investment is not the same as total cash-to-close. Closing costs, prepaids, escrow setup and credits all affect the final number.
| Item | LO teaching point |
|---|---|
| Minimum required investment | 3.5% for maximum financing when MDCS is 580+; cannot be replaced by a seller credit. |
| Seller / interested-party contribution | Generally up to 6% of sales price toward eligible closing costs, prepaid items and discount points; excess or improper inducements must be addressed. |
| Gift funds / DPA | Can help when permitted, but donor/source/transfer and program requirements must be documented. |
| UFMIP | 1.75% of base loan on most forward mortgages and commonly financed. |
| Annual MIP | Paid monthly; percentage and duration vary by LTV, term, loan amount and current HUD table. |
Interview Questions That Change the FHA Structure
Cash & source
How much is available? Where is it held? Gift? DPA? Business funds? Large deposits? The answer changes documentation and cash-to-close.
Credit & housing history
Score is only one part. Ask about late housing, bankruptcy/foreclosure dates, disputed accounts and recent new debt.
Occupancy
Will this be the borrower's principal residence? FHA forward purchases are generally owner-occupied.
Property
Condo, manufactured home, multi-unit, repairs or unusual property characteristics can trigger additional eligibility/appraisal requirements.
New-LO Checkpoint
- Calculate 3.5% down and estimated total cash-to-close separately.
- Calculate front and back DTI using complete PITIA/MIP and debts.
- Confirm the credit/LTV tier and whether the file is AUS or manual.
- Confirm seller credit does not replace minimum investment.
- Read TOTAL/AUS findings and the lender's FHA overlays before quoting the file as approvable.