Ratio of Debt to Income
Your debt to income ratio is a formula lenders use to determine how much of your income is available for a monthly mortgage payment after you meet your other monthly debt payments.
Understanding the qualifying ratio
Usually, 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) qualifying ratio.
The first number in a qualifying ratio is the maximum amount (as a percentage) of gross monthly income that can be applied to housing (this includes loan principal and interest, PMI, homeowner's insurance, taxes, and homeowners' association dues).
The second number is the maximum percentage of your gross monthly income that should be applied to housing costs and recurring debt together. For purposes of this ratio, debt includes payments on credit cards, auto/boat loans, child support, and the like.
Some example data:
A 28/36 qualifying ratio
- Gross monthly income of $8,000 x .28 = $2,240 can be applied to housing
- Gross monthly income of $8,000 x .36 = $2,280 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $8,000 x .29 = $2,320 can be applied to housing
- Gross monthly income of $8,000 x .41 = $3,280 can be applied to recurring debt plus housing expenses
If you'd like to run your own numbers, use this Mortgage Loan Pre-Qualifying Calculator.
Don't forget these are only guidelines. We will be thrilled to go over pre-qualification to determine how much you can afford.
At Norcal Capital Group, Inc, we answer questions about qualifying all the time. Call us: 6507631924.