Debt to Income Ratio
Lenders use a ratio called "debt to income" to decide your maximum monthly payment after your other monthly debts have been paid.
How to figure the qualifying ratio
Most underwriting for conventional mortgage loans needs a qualifying ratio of 28/36. FHA loans are a little less restrictive, requiring a 29/41 ratio.
The first number is how much (by percent) of your gross monthly income that can go toward housing. This ratio is figured on your total payment, including hazard insurance, HOA dues, PMI - everything.
The second number is what percent of your gross income every month which can be applied to housing costs and recurring debt together. For purposes of this ratio, debt includes credit card payments, auto/boat loans, child support, etcetera.
Some example data:
- Gross monthly income of $8,000 x .28 = $2,240 can be applied to housing
- Gross monthly income of $8,000 x .36 = $2,280 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $8,000 x .29 = $2,320 can be applied to housing
- Gross monthly income of $8,000 x .41 = $3,280 can be applied to recurring debt plus housing expenses
If you want to run your own numbers, feel free to use our very useful Loan Pre-Qualification Calculator.
Don't forget these ratios are just guidelines. We will be thrilled to help you pre-qualify to determine how large a mortgage loan you can afford.
Contemporary Mortgage Services, Inc can answer questions about these ratios and many others. Give us a call: 407-834-3377.
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