Debt Ratios for Home Financing
Your debt to income ratio is a tool lenders use to calculate how much money can be used for your monthly home loan payment after you have met your other monthly debt payments.
Understanding the qualifying ratio
In general, underwriting for conventional mortgages requires 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.
The first number in a qualifying ratio is the maximum percentage of gross monthly income that can be applied to housing costs (this includes mortgage principal and interest, private mortgage insurance, hazard insurance, property tax, and homeowners’ association dues).
The second number in the ratio is the maximum percentage of your gross monthly income that can be spent on housing costs and recurring debt together. Recurring debt includes payments on credit cards, vehicle payments, child support, etcetera.
With a 28/36 qualifying ratio
- Gross monthly income of $6,500 x .28 = $1,820 can be applied to housing
- Gross monthly income of $6,500 x .36 = $2,340 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $6,500 x .29 = $1,885 can be applied to housing
- Gross monthly income of $6,500 x .41 = $2,665 can be applied to recurring debt plus housing expenses
Don’t forget these ratios are only guidelines. We will be thrilled to go over pre-qualification to help you figure out how much you can afford.