Debt Ratios for Residential Financing
The debt to income ratio is a tool lenders use to determine how much of your income can be used for your monthly mortgage payment after all your other monthly debts are met.
How to figure your qualifying ratio
For the most part, conventional loans need a qualifying ratio of 28/36. An FHA loan will usually allow for a higher debt load, reflected in a higher (29/41) ratio.
The first number in a qualifying ratio is the maximum amount (as a percentage) of gross monthly income that can be spent on housing (this includes loan principal and interest, PMI, hazard insurance, property taxes, and homeowners' association dues).
The second number is the maximum percentage of your gross monthly income that should be applied to housing costs and recurring debt. Recurring debt includes credit card payments, vehicle loans, child support, etcetera.
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 want to calculate pre-qualification numbers on your own income and expenses, feel free to use our Loan Qualification Calculator.
Don't forget these ratios are just guidelines. We'd be happy to help you pre-qualify to help you determine how much you can afford.
The Reen Team at Direct Mortgage Funding can answer questions about these ratios and many others. Call us at 4086261879.