Debt to Income Ratio
Lenders use a ratio called "debt to income" to decide the most you can pay monthly after your other recurring debts have been paid.
Understanding your qualifying ratio
Most underwriting for conventional mortgages requires 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 be applied to housing (this includes mortgage principal and interest, PMI, homeowner's insurance, property tax, and homeowners' association dues).
The second number is what percent of your gross income every month which can be applied to housing costs and recurring debt. Recurring debt includes auto payments, child support and monthly credit card payments.
Some example data:
- 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 only guidelines. We'd be thrilled to go over pre-qualification to help you figure out how much you can afford.
At Alternative Mortgage Group, we answer questions about qualifying all the time. Give us a call at 561-395-4264.