Ratio of Debt-to-Income
Lenders use a ratio called "debt to income" to determine your maximum monthly payment after you have paid your other recurring loans.
How to figure your qualifying ratio
Most 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) ratio.
The first number is how much (by percent) of your gross monthly income that can go toward housing. This ratio is figured on your total payment, including hazard insurance, HOA dues, PMI - everything that makes up the full payment.
The second number is what percent of your gross income every month that should be spent on housing expenses and recurring debt together. Recurring debt includes things like auto/boat payments, child support and monthly credit card payments.
- 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 calculate pre-qualification numbers with your own financial data, please use this Loan Qualification Calculator.
Don't forget these ratios are only guidelines. We'd be happy to help you pre-qualify to help you determine how large a mortgage 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.