Debt to Income Ratio
Lenders use a ratio called "debt to income" to decide your maximum monthly payment after you have paid your other recurring debts.
About your qualifying ratio
Usually, underwriting for conventional mortgages 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 is the percentage of your gross monthly income that can go toward housing. This ratio is figured on your total payment, including homeowners' insurance, homeowners' dues, PMI - everything that constitutes the full payment.
The second number in the ratio is what percent of your gross income every month that should be applied to housing expenses and recurring debt together. Recurring debt includes payments on credit cards, auto payments, child support, and the like.
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, feel free to use our very useful Mortgage Qualification Calculator.
Remember these are just guidelines. We will be happy to help you pre-qualify to help you figure out how much you can afford.
At Atlantic Financial Services, we answer questions about qualifying all the time. Give us a call at (732) 969-9300.