Ratio of Debt to Income
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after your other recurring debts are paid.
About your qualifying ratio
For the most part, 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 percentage of gross monthly income that can go to housing (this includes principal and interest, PMI, 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 auto/boat loans, child support and monthly credit card payments.
Examples:
A 28/36 qualifying ratio
- Gross monthly income of $4,500 x .28 = $1,260 can be applied to housing
- Gross monthly income of $4,500 x .36 = $1,620 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $4,500 x .29 = $1,305 can be applied to housing
- Gross monthly income of $4,500 x .41 = $1,845 can be applied to recurring debt plus housing expenses
If you want to calculate pre-qualification numbers on your own income and expenses, feel free to use our very useful Mortgage Loan Pre-Qualification Calculator.
Just Guidelines
Don't forget these ratios are only guidelines. We will be thrilled to go over pre-qualification to help you figure out how much you can afford.
North American Financial nmls#180736, can answer questions about these ratios and many others. Call us at (702) 524-1376.