Debt Ratios for Residential Financing
The debt to income ratio is a tool lenders use to determine how much money can be used for your monthly mortgage payment after all your other recurring debts are fulfilled.
About the qualifying ratio
Typically, conventional mortgage loans need a qualifying ratio of 28/36. FHA loans are less strict, requiring a 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 tax, and homeowners' association dues).
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 together. Recurring debt includes payments on credit cards, car payments, child support, and the like.
- 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 calculate pre-qualification numbers on your own income and expenses, we offer a Mortgage Loan Qualification Calculator.
Remember these are only guidelines. We'd be happy to pre-qualify you to help you determine how large a mortgage loan you can afford.
American Commerce Mortgage can answer questions about these ratios and many others. Give us a call: 714-970-9700.