Ratio of Debt to Income
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The ratio of debt to income is a tool lenders use to calculate how much money is available for your monthly home loan payment after all your other recurring debts are fulfilled.
Understanding the qualifying ratio
Most 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) qualifying ratio.
The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can be spent on housing costs (including principal and interest, private mortgage insurance, 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 expenses and recurring debt. For purposes of this ratio, debt includes payments on credit cards, auto/boat payments, child support, and the like.
Examples:
With a 28/36 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'd like to calculate pre-qualification numbers with your own financial data, use this Mortgage Qualifying Calculator.
Remember these ratios are only guidelines. We will be happy to go over pre-qualification to help you determine how large a mortgage you can afford.
At Jadestone Mortgage Inc., we answer questions about qualifying all the time. Give us a call at (510) 682-3792.