Debt Ratios for Residential Lending
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after your other monthly debts have been paid.
About the qualifying ratio
In general, underwriting for conventional loans needs 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 (including loan principal and interest, PMI, hazard insurance, property tax, and homeowners' association dues).
The second number in the ratio is the maximum percentage of your gross monthly income which can be applied to housing costs and recurring debt. Recurring debt includes car loans, child support and monthly credit card payments.
For example:
With a 28/36 qualifying ratio
- Gross monthly income of $3,500 x .28 = $980 can be applied to housing
- Gross monthly income of $3,500 x .36 = $1,260 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $3,500 x .29 = $1,015 can be applied to housing
- Gross monthly income of $3,500 x .41 = $1,435 can be applied to recurring debt plus housing expenses
If you'd like to calculate pre-qualification numbers with your own financial data, please use this Mortgage Qualification Calculator.
Guidelines Only
Don't forget these ratios are only guidelines. We will be happy to help you pre-qualify to help you determine how large a mortgage you can afford.
Mortgage Headquarters of Missouri, Inc can answer questions about these ratios and many others. Give us a call at 5733029990.