Lenders use a ratio called "debt to income" to decide your maximum monthly payment after you have paid your other recurring debts.
Understanding the qualifying ratio
Usually, conventional loans require a qualifying ratio of 28/36. FHA loans are a little less strict, requiring a 29/41 ratio.
The first number in a qualifying ratio is the maximum amount (as a percentage) of gross monthly income that can be spent on housing (this includes loan principal and interest, PMI, hazard insurance, taxes, and homeowners' association dues).
The second number is what percent of your gross income every month that can be spent on housing costs and recurring debt. Recurring debt includes auto/boat loans, child support and monthly credit card payments.
Some example data:
- 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 calculate pre-qualification numbers on your own income and expenses, feel free to use our Loan Qualifying Calculator.
Remember these are just guidelines. We will be happy to pre-qualify you to help you figure out how large a mortgage you can afford.
Atlantic Financial Services can walk you through the pitfalls of getting a mortgage. Call us at (732) 969-9300.