Final answer:
On an FHA mortgage, the stretch ratio refers to the debt-to-income (DTI) ratio that is allowed for an applicant. Under normal conditions, the maximum stretch ratio allowed by the FHA is 31%, but it can go up to 43% under certain circumstances. To qualify for a higher stretch ratio, applicants need a strong credit history and compensating factors.
Step-by-step explanation:
On an FHA mortgage, the stretch ratio refers to the debt-to-income (DTI) ratio that is allowed for an applicant. The DTI ratio compares the total monthly debts of the applicant to their gross monthly income. To qualify for an FHA mortgage, the stretch ratio must meet certain conditions.
Under normal conditions, the maximum stretch ratio allowed by the Federal Housing Administration (FHA) is 31%. This means that the applicant's total monthly debts, including the potential mortgage payment, should not exceed 31% of their gross monthly income. However, under certain circumstances, FHA may allow a stretch ratio of up to 43%.
One condition for a higher stretch ratio is a strong credit history. The applicant should have a credit score of at least 580 to be eligible for the higher DTI ratio. Additionally, the applicant should have compensating factors such as a larger down payment or significant cash reserves to demonstrate their ability to handle a higher debt burden.