Ratio of Debt-to-Income
Lenders use a ratio called "debt to income" to determine your maximum monthly payment after you've paid your other recurring debts.
Understanding your qualifying ratio
For the most part, underwriting for conventional mortgages requires a qualifying ratio of 28/36. An FHA loan will usually allow for a higher debt load, reflected in a higher (29/41) ratio.
The first number in a qualifying ratio is the maximum percentage of gross monthly income that can be applied to housing (this includes principal and interest, private mortgage insurance, homeowner's insurance, property taxes, and homeowners' association dues).
The second number in the ratio is the maximum percentage of your gross monthly income that can be spent on housing costs and recurring debt. Recurring debt includes things like auto/boat payments, child support and credit card payments.
For example:
28/36 (Conventional)
- Gross monthly income of $2,700 x .28 = $756 can be applied to housing
- Gross monthly income of $2,700 x .36 = $972 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $2,700 x .29 = $783 can be applied to housing
- Gross monthly income of $2,700 x .41 = $1,107 can be applied to recurring debt plus housing expenses
If you'd like to run your own numbers, feel free to use our very useful Mortgage Loan Qualification Calculator.
Guidelines Only
Don't forget these ratios are only guidelines. We'd be happy to help you pre-qualify to help you figure out how large a mortgage loan you can afford.
America's Money Source can answer questions about these ratios and many others. Give us a call: 4078987559.