Ratio of Debt to Income
Lenders use a ratio called "debt to income" to determine your maximum monthly payment after your other monthly debts have been paid.
Understanding your qualifying ratio
Typically, underwriting for conventional mortgage loans requires 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 gross monthly income that can be spent on housing costs (this includes mortgage principal and interest, private mortgage insurance, hazard insurance, property tax, and homeowners' association dues).
The second number in the ratio is the maximum percentage of your gross monthly income that should be spent on housing expenses and recurring debt together. For purposes of this ratio, debt includes payments on credit cards, vehicle payments, child support, and the like.
Some example data:
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 want to calculate pre-qualification numbers with your own financial data, use this Loan Qualification Calculator.
Remember these are only guidelines. We will be happy to go over pre-qualification to help you figure out how much you can afford.
Chris Caggiano - Grand Oaks Funding, LLC can answer questions about these ratios and many others. Give us a call: (718) 477-4405.