Lenders use a ratio called "debt to income" to decide the most you can pay monthly after your other monthly debts have been paid.
Understanding the qualifying ratio
Typically, conventional mortgage loans need a qualifying ratio of 28/36. FHA loans are less restrictive, requiring a 29/41 ratio.
The first number in a qualifying ratio is the maximum amount (as a percentage) of gross monthly income that can be applied to housing (this includes mortgage principal and interest, private mortgage insurance, homeowner's insurance, taxes, and homeowners' association dues).
The second number is what percent of your gross income every month that should be applied to housing costs and recurring debt. Recurring debt includes payments on credit cards, car payments, child support, etcetera.
Some example data:
- 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 on your own income and expenses, use this Loan Pre-Qualifying Calculator.
Remember these are only guidelines. We will be happy to help you pre-qualify to determine how large a mortgage you can afford.
Chris Caggiano - Grand Oaks Funding, LLC can walk you through the pitfalls of getting a mortgage. Give us a call: (718) 477-4405.