Debt Ratios for Residential Lending
Your ratio of debt to income is a formula lenders use to calculate how much money can be used for your monthly home loan payment after all your other monthly debt obligations have been met.
Understanding the qualifying ratio
Usually, underwriting for conventional mortgages needs 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 percentage of your gross monthly income that can be applied to housing costs (this includes mortgage principal and interest, PMI, 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. For purposes of this ratio, debt includes credit card payments, vehicle payments, child support, etcetera.
With a 28/36 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 want to calculate pre-qualification numbers with your own financial data, feel free to use our Loan Qualifying Calculator.
Don't forget these ratios are only guidelines. We'd be thrilled to go over pre-qualification to determine how much you can afford.
Donald Stiefer can walk you through the pitfalls of getting a mortgage. Give us a call at 5806959369.