Debt Ratios for Home Lending
Lenders use a ratio called "debt to income" to decide your maximum monthly payment after you have paid your other recurring loans.
How to figure the qualifying ratio
Typically, 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) ratio.
The first number in a qualifying ratio is the maximum percentage of gross monthly income that can be spent on housing costs (this includes mortgage principal and interest, private mortgage insurance, homeowner's insurance, property tax, and HOA dues).
The second number is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt. Recurring debt includes auto loans, child support and monthly credit card payments.
- 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'd like to run your own numbers, use this Mortgage Loan Qualification Calculator.
Remember these are just guidelines. We will be thrilled to pre-qualify you to determine how much you can afford.
Atlantic Financial Services can answer questions about these ratios and many others. Call us at (732) 969-9300.