Debt Ratios for Residential Financing
Lenders use a ratio called "debt to income" to decide your maximum monthly payment after you have paid your other recurring debts.
About your qualifying ratio
For the most part, 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.
The first number in a qualifying ratio is the maximum percentage of gross monthly income that can be applied to housing (this includes loan principal and interest, private mortgage insurance, homeowner's insurance, property taxes, and homeowners' association dues).
The second number in the ratio is what percent of your gross income every month that should be applied to housing expenses and recurring debt. Recurring debt includes things like auto payments, child support and credit card payments.
For example:
A 28/36 qualifying ratio
- 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, use this Mortgage Qualification Calculator.
Guidelines Only
Remember these are just guidelines. We'd be happy to help you pre-qualify to help you figure out how large a mortgage you can afford.
Coastal Mortgage Corp. can answer questions about these ratios and many others. Call us: 504-866-5626.