Debt/Income Ratio
Lenders use a ratio called "debt to income" to decide the most you can pay monthly after you've paid your other recurring debts.
Understanding the qualifying ratio
For the most part, conventional loans need 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 percentage of gross monthly income that can go to housing (this includes loan principal and interest, private mortgage insurance, hazard insurance, taxes, and homeowners' association dues).
The second number is the maximum percentage of your gross monthly income which can be applied to housing expenses and recurring debt together. Recurring debt includes credit card payments, car payments, child support, etcetera.
Some example data:
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 run your own numbers, feel free to use our superb Mortgage Pre-Qualifying Calculator.
Guidelines Only
Remember these are just guidelines. We will be happy to help you pre-qualify to help you figure out how much you can afford.
Custom Lending Group can walk you through the pitfalls of getting a mortgage. Give us a call: 7072522700.