Debt Ratios for Residential Lending
Your debt to income ratio is a formula lenders use to determine how much of your income can be used for your monthly mortgage payment after you meet your other monthly debt payments.
Understanding your qualifying ratio
For the most part, underwriting for conventional mortgage loans needs 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 HOA dues).
The second number in the ratio is the maximum percentage of your gross monthly income that should be spent on housing expenses and recurring debt together. Recurring debt includes credit card payments, car loans, child support, etcetera.
- Gross monthly income of $8,000 x .28 = $2,240 can be applied to housing
- Gross monthly income of $8,000 x .36 = $2,280 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $8,000 x .29 = $2,320 can be applied to housing
- Gross monthly income of $8,000 x .41 = $3,280 can be applied to recurring debt plus housing expenses
If you want to run your own numbers, use this Loan Qualifying Calculator.
Don't forget these ratios are just guidelines. We will be happy to help you pre-qualify to help you determine how much you can afford.
Net Equity Financial Mortgage can walk you through the pitfalls of getting a mortgage. Call us at (215)741-3131.