Debt Ratios for Home Lending
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after you have paid your other monthly loans.
How to figure your qualifying ratio
Most 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 amount (as a percentage) of gross monthly income that can go to housing (this includes loan principal and interest, private mortgage insurance, hazard insurance, taxes, and homeowners' association dues).
The second number is the maximum percentage of your gross monthly income that should be applied to housing costs and recurring debt. Recurring debt includes auto payments, child support and credit card payments.
- 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 calculate pre-qualification numbers on your own income and expenses, feel free to use our very useful Loan Pre-Qualifying Calculator.
Remember these are just guidelines. We will be thrilled to pre-qualify you to help you determine how large a mortgage loan you can afford.
Cottingham Mortgage Inc. can walk you through the pitfalls of getting a mortgage. Give us a call: (800) 288-9693.