Debt Ratios for Residential Financing
Your debt to income ratio is a formula lenders use to determine how much of your income is available for your monthly home loan payment after you have met your other monthly debt payments.
Understanding the qualifying ratio
Usually, conventional mortgages need 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 be spent on housing costs (this includes loan principal and interest, private mortgage insurance, homeowner's insurance, property taxes, and HOA dues).
The second number is what percent of your gross income every month that can be applied to housing expenses and recurring debt together. For purposes of this ratio, debt includes payments on credit cards, car loans, child support, etcetera.
For example:
28/36 (Conventional)
- 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 want to run your own numbers, feel free to use our superb Mortgage Qualification Calculator.
Guidelines Only
Don't forget these ratios are just guidelines. We'd be thrilled to help you pre-qualify to help you figure out how large a mortgage you can afford.
Norcal Capital Group, Inc can answer questions about these ratios and many others. Give us a call: 6507631924.