Lenders use a ratio called "debt to income" to determine your maximum monthly payment after you have paid your other recurring loans.
Understanding the qualifying ratio
For the most part, underwriting for conventional mortgage loans requires 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 your gross monthly income that can be applied to housing (this includes principal and interest, private mortgage insurance, hazard insurance, property tax, and homeowners' association dues).
The second number is what percent of your gross income every month that can be applied to housing costs and recurring debt together. Recurring debt includes vehicle payments, child support and monthly credit card payments.
Some example data:
A 28/36 qualifying 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 run your own numbers, feel free to use our superb Mortgage Qualification Calculator.
Remember these are just guidelines. We will be thrilled to pre-qualify you to determine how much you can afford.
Price Mortgage Group LLC can answer questions about these ratios and many others. Give us a call: 405-513-7700.