Debt Ratios for Home Financing
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after your other recurring debts have been paid.
About the qualifying ratio
Usually, 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 is how much (by percent) 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 makes up the payment.
The second number is what percent of your gross income every month which can be applied to housing expenses and recurring debt together. Recurring debt includes things like vehicle payments, child support and credit card payments.
- Gross monthly income of $3,500 x .28 = $980 can be applied to housing
- Gross monthly income of $3,500 x .36 = $1,260 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $3,500 x .29 = $1,015 can be applied to housing
- Gross monthly income of $3,500 x .41 = $1,435 can be applied to recurring debt plus housing expenses
If you want to run your own numbers, we offer a Mortgage Qualification Calculator.
Remember these are just guidelines. We will be happy to go over pre-qualification to help you determine how large a mortgage loan you can afford.
Norcal Capital Group, Inc can answer questions about these ratios and many others. Call us: 6507631924.