Debt-to-Income Ratio
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Lenders use a ratio called "debt to income" to determine your maximum monthly payment after you've paid your other recurring debts.
Understanding your qualifying ratio
In general, conventional mortgage loans require a qualifying ratio of 28/45. An FHA loan will usually allow for a higher debt load, reflected in a higher (29/50) qualifying ratio.
For these ratios, the first number is how much (by percent) of your gross monthly income that can be spent on housing. This ratio is figured on your total payment, including homeowners' insurance, homeowners' dues, mortgage insurance - everything.
The second number is the maximum percentage of your gross monthly income that can be applied to housing costs and recurring debt. Recurring debt includes things like vehicle loans, child support and credit card payments.
Examples:
28/45 (Conventional)
- Gross monthly income of $6,500 x .28 = $1,820 can be applied to housing
- Gross monthly income of $6,500 x .45 = $2,925 can be applied to recurring debt plus housing expenses
With a 29/50 (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 .50 = $3,250 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 Loan Qualification Calculator.
Don't forget these ratios are only guidelines. We'd be happy to go over pre-qualification to determine how large a mortgage you can afford. Jim Dorney can walk you through the pitfalls of getting a mortgage. Give us a call at (303) 443-5566.