Debt Ratios for Home Financing
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after your other recurring debts have been paid.
Understanding your qualifying ratio
Usually, conventional mortgages require a qualifying ratio of 28/36. An FHA loan will usually allow for a higher debt load, reflected in a higher (29/41) qualifying ratio.
The first number in a qualifying ratio is the maximum amount (as a percentage) of your gross monthly income that can be spent on housing costs (including principal and interest, private mortgage insurance, homeowner's insurance, property taxes, and homeowners' association dues).
The second number is what percent of your gross income every month which can be spent on housing costs and recurring debt together. Recurring debt includes auto loans, child support and monthly credit card payments.
Examples:
A 28/36 qualifying ratio
- Gross monthly income of $8,000 x .28 = $2,240 can be applied to housing
- Gross monthly income of $8,000 x .36 = $2,280 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $8,000 x .29 = $2,320 can be applied to housing
- Gross monthly income of $8,000 x .41 = $3,280 can be applied to recurring debt plus housing expenses
If you'd like to run your own numbers, use this Loan Qualifying Calculator.
Just Guidelines
Remember these are just guidelines. We'd be happy to help you pre-qualify to help you figure out how large a mortgage you can afford.
America's Money Source can walk you through the pitfalls of getting a mortgage. Give us a call at 4078987559.