Debt Ratios for Residential Financing
Your debt to income ratio is a tool lenders use to calculate how much of your income can be used for a monthly home loan payment after you meet your various other monthly debt payments.
Understanding your qualifying ratio
For the most part, underwriting for conventional mortgage loans 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.
The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can go to housing costs (including principal and interest, private mortgage insurance, homeowner's insurance, taxes, and HOA dues).
The second number is what percent of your gross income every month that should be spent on housing costs and recurring debt. For purposes of this ratio, debt includes payments on credit cards, auto loans, child support, and the like.
For example:
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 want to calculate pre-qualification numbers on your own income and expenses, we offer a Loan Pre-Qualifying Calculator.
Just Guidelines
Remember these ratios are just guidelines. We'd be happy to help you pre-qualify to help you figure out how large a mortgage you can afford.
At Hook and Ladder Lending - powered by Sublime Financial, LLC, we answer questions about qualifying all the time. Give us a call: 9722920448.