Ratio of Debt to Income
Lenders use a ratio called "debt to income" to decide the most you can pay monthly after your other recurring debts are paid.
Understanding your qualifying ratio
Usually, underwriting for conventional loans requires a qualifying ratio of 28/36. An FHA loan will usually allow for a higher debt load, reflected in a higher (29/41) qualifying ratio.
In these ratios, 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 makes up the payment.
The second number is what percent of your gross income every month that should be spent on housing costs and recurring debt together. Recurring debt includes payments on credit cards, auto/boat loans, child support, etcetera.
A 28/36 ratio
- Gross monthly income of $2,700 x .28 = $756 can be applied to housing
- Gross monthly income of $2,700 x .36 = $972 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $2,700 x .29 = $783 can be applied to housing
- Gross monthly income of $2,700 x .41 = $1,107 can be applied to recurring debt plus housing expenses
If you want to calculate pre-qualification numbers on your own income and expenses, use this Loan Qualification Calculator.
Remember these ratios are just guidelines. We'd be thrilled to help you pre-qualify to help you figure out how much you can afford.
At Reliance Mortgage Service, Inc, we answer questions about qualifying all the time. Call us at 562 320-0510.