Lenders use a ratio called "debt to income" to decide the most you can pay monthly after you have paid your other monthly debts.
How to figure your qualifying ratio
Usually, conventional loans require a qualifying ratio of 28/36. FHA loans are a little less restrictive, requiring a 29/41 ratio.
The first number is the percentage of your gross monthly income that can go toward housing. This ratio is figured on your total payment, including hazard insurance, homeowners' dues, Private Mortgage Insurance - everything.
The second number in the ratio is the maximum percentage of your gross monthly income which can be spent on housing expenses and recurring debt. Recurring debt includes auto payments, child support and monthly credit card payments.
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 calculate pre-qualification numbers with your own financial data, feel free to use our very useful Loan Qualifying Calculator.
Don't forget these are only guidelines. We'd be thrilled to go over pre-qualification to help you determine how much you can afford.
Atlantic Financial Services can walk you through the pitfalls of getting a mortgage. Give us a call at (732) 969-9300.