Ratio of Debt to Income
The debt to income ratio is a formula lenders use to calculate how much money is available for a monthly home loan payment after you meet your other monthly debt payments.
How to figure the qualifying ratio
Most underwriting for conventional mortgages requires a qualifying ratio of 28/36. FHA loans are less restrictive, requiring a 29/41 ratio.
The first number is the percentage of your gross monthly income that can be spent on housing. 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 can be spent on housing costs and recurring debt together. Recurring debt includes things like auto/boat loans, child support and monthly credit card payments.
Examples:
28/36 (Conventional)
- 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 run your own numbers, feel free to use our very useful Mortgage Pre-Qualifying Calculator.
Guidelines Only
Remember these are just guidelines. We'd be happy to help you pre-qualify to help you determine how much you can afford.
ADVISORY MORTGAGE can answer questions about these ratios and many others. Call us at 8102292820.