Ratio of Debt-to-Income
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Lenders use a ratio called "debt to income" to decide the most you can pay monthly after your other recurring debts are paid.
Understanding the qualifying ratio
Usually, 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) qualifying ratio.
In these ratios, the first number is how much (by percent) of your gross monthly income that can go toward housing costs. This ratio is figured on your total payment, including hazard insurance, HOA dues, Private Mortgage Insurance - everything that constitutes the payment.
The second number is what percent of your gross income every month that should be applied to housing costs and recurring debt together. Recurring debt includes auto/boat payments, child support and credit card payments.
Some example data:
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 calculate pre-qualification numbers on your own income and expenses, please use this Mortgage Pre-Qualification Calculator.
Don't forget these are just guidelines. We'd be happy to go over pre-qualification to help you determine how much you can afford.
The Mortgage Partner can answer questions about these ratios and many others. Call us at (949) 249-3067.