Debt-to-Income Ratio
The debt to income ratio is a formula lenders use to calculate how much of your income can be used for a monthly mortgage payment after you meet your other monthly debt payments.
Understanding your qualifying ratio
Usually, conventional mortgages need 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 amount (as a percentage) of your gross monthly income that can be applied to housing (this includes principal and interest, PMI, hazard insurance, taxes, and homeowners' association dues).
The second number is the maximum percentage of your gross monthly income that should be spent on housing costs and recurring debt. Recurring debt includes auto loans, child support and credit card payments.
Examples:
A 28/36 ratio
- Gross monthly income of $6,500 x .28 = $1,820 can be applied to housing
- Gross monthly income of $6,500 x .36 = $2,340 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $6,500 x .29 = $1,885 can be applied to housing
- Gross monthly income of $6,500 x .41 = $2,665 can be applied to recurring debt plus housing expenses
If you'd like to run your own numbers, we offer a Mortgage Qualifying Calculator.
Guidelines Only
Remember these ratios are only guidelines. We'd be thrilled to go over pre-qualification to help you figure out how large a mortgage you can afford.
Debbie Oliver NMLS License #248252, America's First Choice Mortgage, NMLS License #279234 can answer questions about these ratios and many others. Give us a call: 2146635355.