Debt Ratios for Residential Lending
Lenders use a ratio called "debt to income" to decide the most you can pay monthly after your other recurring debts are paid.
About your qualifying ratio
In general, underwriting for conventional 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 your gross monthly income that can be spent on housing (including principal and interest, private mortgage insurance, hazard insurance, property tax, and homeowners' association dues).
The second number in the ratio is what percent of your gross income every month which can be applied to housing expenses and recurring debt. For purposes of this ratio, debt includes credit card payments, vehicle payments, child support, and the like.
A 28/36 qualifying ratio
- Gross monthly income of $6,500 x .28 = $1,820 can be applied to housing
- Gross monthly income of $6,500 x .36 = $2,340 can be applied to recurring debt plus housing expenses
With a 29/41 (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 .41 = $2,665 can be applied to recurring debt plus housing expenses
If you'd like to calculate pre-qualification numbers on your own income and expenses, we offer a Mortgage Qualification Calculator.
Don't forget these ratios are only guidelines. We'd be happy to go over pre-qualification to determine how much you can afford.
Price Mortgage Group LLC can answer questions about these ratios and many others. Give us a call at 405-513-7700.