Debt Ratios for Home Lending
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The debt to income ratio is a formula lenders use to calculate how much money can be used for a monthly home loan payment after all your other monthly debt obligations are fulfilled.
About your qualifying ratio
Usually, conventional loans require a qualifying ratio of 28/36. An FHA loan will usually allow for a higher debt load, reflected in a higher (29/41) ratio.
In these ratios, the first number is the percentage of your gross monthly income that can be spent on housing. This ratio is figured on your total payment, including hazard insurance, homeowners' dues, Private Mortgage Insurance - everything that constitutes the full payment.
The second number in the ratio is what percent of your gross income every month that should be spent on housing costs and recurring debt. For purposes of this ratio, debt includes credit card payments, car payments, child support, and the like.
For example:
A 28/36 qualifying 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, we offer a Mortgage Loan Pre-Qualifying Calculator.
Don't forget these ratios are only guidelines. We will be happy to pre-qualify you to help you determine how large a mortgage you can afford.
Metro Mortgage can walk you through the pitfalls of getting a mortgage. Call us at 800-252-6633.