Debt Ratios for Residential Lending
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after your other monthly debts are paid.
Understanding the qualifying ratio
Usually, conventional mortgage loans need 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 amount (as a percentage) of gross monthly income that can go to housing costs (this includes loan principal and interest, private mortgage insurance, homeowner's insurance, taxes, and HOA dues).
The second number in the ratio is what percent of your gross income every month which can be applied to housing costs and recurring debt together. Recurring debt includes things like car payments, child support and monthly credit card payments.
Some example data:
28/36 (Conventional)
- 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 want to calculate pre-qualification numbers with your own financial data, please use this Mortgage Loan Qualification Calculator.
Guidelines Only
Don't forget these ratios are only guidelines. We'd be thrilled to help you pre-qualify 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. Call us: 5122916100.