Debt Ratios for Residential Lending
Your ratio of debt to income is a formula lenders use to calculate how much of your income can be used for a monthly mortgage payment after all your other recurring debts have been met.
Understanding the qualifying ratio
In general, underwriting for conventional mortgage 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 amount (as a percentage) of gross monthly income that can go to housing costs (including mortgage principal and interest, private mortgage insurance, hazard insurance, property taxes, and HOA dues).
The second number in the ratio is what percent of your gross income every month which can be spent on housing costs and recurring debt. Recurring debt includes auto/boat loans, child support and monthly credit card payments.
- 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'd like to run your own numbers, we offer a Loan Qualifying Calculator.
Remember these ratios are only guidelines. We'd be thrilled to pre-qualify you to determine how much you can afford.
America's Money Source can answer questions about these ratios and many others. Call us: 4078987559.