Ratio of Debt to Income
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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
Typically, underwriting for conventional loans needs a qualifying ratio of 28/36. FHA loans are a little less restrictive, requiring a 29/41 ratio.
The first number in a qualifying ratio is the maximum percentage of gross monthly income that can be applied to housing (including principal and interest, private mortgage insurance, hazard insurance, taxes, and HOA dues).
The second number in the ratio is what percent of your gross income every month that can be applied to housing expenses and recurring debt. Recurring debt includes things like auto/boat payments, child support and monthly 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'd like to calculate pre-qualification numbers with your own financial data, use this Loan Qualification Calculator.
Remember these are only guidelines. We'd be thrilled to go over pre-qualification to determine how much you can afford.