Ratio of Debt to Income
Lenders use a ratio called "debt to income" to decide your maximum monthly payment after you have paid your other monthly debts.
Understanding the qualifying ratio
Typically, underwriting for conventional mortgages requires a qualifying ratio of 28/36. FHA loans are a little less strict, requiring a 29/41 ratio.
For these ratios, the first number is the percentage of your gross monthly income that can be spent on housing costs. This ratio is figured on your total payment, including homeowners' insurance, HOA dues, PMI - everything.
The second number in the ratio is what percent of your gross income every month which can be spent on housing costs and recurring debt together. Recurring debt includes car loans, child support and credit card payments.
Some example data:
- Gross monthly income of $4,500 x .28 = $1,260 can be applied to housing
- Gross monthly income of $4,500 x .36 = $1,620 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $4,500 x .29 = $1,305 can be applied to housing
- Gross monthly income of $4,500 x .41 = $1,845 can be applied to recurring debt plus housing expenses
If you'd like to calculate pre-qualification numbers with your own financial data, feel free to use our very useful Loan Pre-Qualifying 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.
At Peerless Residential Mortgage, we answer questions about qualifying all the time. Give us a call at (513) 713-1515.