Lenders use a ratio called "debt to income" to determine your maximum monthly payment after you've paid your other recurring debts.
About the qualifying ratio
In general, conventional mortgages 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 your gross monthly income that can be spent on housing costs (this includes mortgage principal and interest, private mortgage insurance, hazard insurance, property taxes, and HOA dues).
The second number in the ratio is what percent of your gross income every month that can be spent on housing expenses and recurring debt. Recurring debt includes things like auto payments, child support and credit card payments.
- Gross monthly income of $2,700 x .28 = $756 can be applied to housing
- Gross monthly income of $2,700 x .36 = $972 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $2,700 x .29 = $783 can be applied to housing
- Gross monthly income of $2,700 x .41 = $1,107 can be applied to recurring debt plus housing expenses
If you'd like to calculate pre-qualification numbers on your own income and expenses, use this Mortgage Pre-Qualification Calculator.
Remember these are only guidelines. We'd be happy to go over pre-qualification to help you determine how much you can afford.
Net Equity Financial Mortgage can answer questions about these ratios and many others. Call us: (215)741-3131.