Ratio of Debt-to-Income
The debt to income ratio is a formula lenders use to determine how much of your income is available for a monthly mortgage payment after all your other monthly debts have been fulfilled.
How to figure the qualifying ratio
In general, underwriting for conventional mortgages requires a qualifying ratio of 28/36. FHA loans are a little 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 (including principal and interest, private mortgage insurance, hazard insurance, property tax, and homeowners' association dues).
The second number is what percent of your gross income every month that should be applied to housing expenses and recurring debt. Recurring debt includes credit card payments, vehicle payments, child support, etcetera.
With a 28/36 qualifying ratio
- Gross monthly income of $8,000 x .28 = $2,240 can be applied to housing
- Gross monthly income of $8,000 x .36 = $2,280 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $8,000 x .29 = $2,320 can be applied to housing
- Gross monthly income of $8,000 x .41 = $3,280 can be applied to recurring debt plus housing expenses
If you want to calculate pre-qualification numbers with your own financial data, we offer a Mortgage Loan Pre-Qualifying Calculator.
Don't forget these are only guidelines. We will be thrilled to pre-qualify you to determine how large a mortgage loan you can afford.
Custom Lending Group can answer questions about these ratios and many others. Give us a call at 7072522700.