Ratio of Debt to Income
Lenders use a ratio called "debt to income" to determine your maximum monthly payment after you have paid your other recurring debts.
How to figure the qualifying ratio
In general, underwriting for conventional 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 your gross monthly income that can be applied to housing costs (including mortgage principal and interest, PMI, hazard insurance, property tax, and homeowners' association dues).
The second number is what percent of your gross income every month that can be applied to housing expenses and recurring debt. Recurring debt includes things like auto/boat loans, child support and credit card payments.
Examples:
28/36 (Conventional)
- 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 on your own income and expenses, we offer a Loan Pre-Qualifying Calculator.
Just Guidelines
Remember these ratios are just guidelines. We will be thrilled to go over pre-qualification to help you figure out how much you can afford.
Southwest Funding #841
Company NMLS # 303440 can answer questions about these ratios and many others. Give us a call: 5122916100.