Debt Ratios for Residential Lending
Lenders use a ratio called "debt to income" to decide the most you can pay monthly after you have paid your other recurring loans.
How to figure the qualifying ratio
Most conventional mortgage loans require a qualifying ratio of 28/36. FHA loans are less restrictive, requiring a 29/41 ratio.
The first number in a qualifying ratio is the maximum amount (as a percentage) of your gross monthly income that can be spent on housing costs (this includes mortgage principal and interest, PMI, hazard insurance, property tax, and homeowners' association dues).
The second number in the ratio is what percent of your gross income every month that should be applied to housing expenses and recurring debt together. Recurring debt includes auto payments, child support and monthly credit card payments.
For example:
A 28/36 qualifying ratio
- 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, we offer a Mortgage Loan Qualification Calculator.
Just Guidelines
Remember these are only guidelines. We will be happy to pre-qualify you to help you figure out how large a mortgage loan you can afford.
ADVISORY MORTGAGE can answer questions about these ratios and many others. Give us a call: 8102292820.