Debt to Income Ratio
Lenders use a ratio called "debt to income" to determine your maximum monthly payment after your other monthly debts are paid.
About the qualifying ratio
Typically, conventional loans need 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 homeowners' insurance, HOA dues, Private Mortgage Insurance - everything.
The second number is what percent of your gross income every month which can be applied to housing expenses and recurring debt together. For purposes of this ratio, debt includes payments on credit cards, auto/boat loans, child support, etcetera.
Some example data:
- 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'd like to calculate pre-qualification numbers on your own income and expenses, feel free to use our Mortgage Loan Pre-Qualifying Calculator.
Remember these are just guidelines. We'd be happy to help you pre-qualify to help you determine how large a mortgage you can afford.
Carter Financial Solutions can walk you through the pitfalls of getting a mortgage. Call us at 866-840-8745 x2.