Debt-to-Income Ratio
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Lenders use a ratio called "debt to income" to decide your maximum monthly payment after you've paid your other recurring loans.
Understanding the qualifying ratio
Usually, underwriting for conventional mortgage 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 is how much (by percent) of your gross monthly income that can be spent on housing costs. This ratio is figured on your total payment, including hazard insurance, homeowners' dues, PMI - everything that constitutes the payment.
The second number in the ratio is what percent of your gross income every month that should be applied to housing costs and recurring debt. Recurring debt includes things like auto loans, child support and credit card payments.
Examples:
With 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'd like to calculate pre-qualification numbers with your own financial data, please use this Mortgage Qualification Calculator.
Don't forget these are only guidelines. We'd be happy to help you pre-qualify to determine how large a mortgage loan you can afford. Bob Rutledge can walk you through the pitfalls of getting a mortgage. Call us at (314) 913-9678.