Debt-to-Income Ratio
Lenders use a ratio called "debt to income" to determine your maximum monthly payment after you've paid your other recurring loans.
Understanding your qualifying ratio
In general, 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) ratio.
The first number is how much (by percent) of your gross monthly income that can be spent on housing. This ratio is figured on your total payment, including homeowners' insurance, homeowners' dues, Private Mortgage Insurance - everything that constitutes the payment.
The second number in the ratio is the maximum percentage of your gross monthly income that can be applied to housing costs and recurring debt. Recurring debt includes auto/boat payments, child support and monthly credit card payments.
Examples:
28/36 (Conventional)
- 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 run your own numbers, please use this Loan Qualification Calculator.
Just Guidelines
Don't forget these ratios are just guidelines. We'd be thrilled to help you pre-qualify to determine how large a mortgage you can afford.
One Source Lending can answer questions about these ratios and many others. Give us a call: 3032207500.