Debt to Income Ratio
Lenders use a ratio called "debt to income" to determine your maximum monthly payment after your other recurring debts are paid.
Understanding the qualifying ratio
For the most part, conventional mortgage loans require 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 amount (as a percentage) of your gross monthly income that can go to housing (this includes loan principal and interest, PMI, hazard insurance, property tax, and HOA dues).
The second number is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt together. Recurring debt includes auto/boat payments, child support and monthly credit card payments.
Some example data:
- Gross monthly income of $2,700 x .28 = $756 can be applied to housing
- Gross monthly income of $2,700 x .36 = $972 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $2,700 x .29 = $783 can be applied to housing
- Gross monthly income of $2,700 x .41 = $1,107 can be applied to recurring debt plus housing expenses
If you'd like to calculate pre-qualification numbers with your own financial data, we offer a Mortgage Loan Qualification Calculator.
Remember these ratios are only guidelines. We'd be happy to help you pre-qualify to determine how large a mortgage you can afford.
PREMIERE MORTGAGE SERVICES INC. can walk you through the pitfalls of getting a mortgage. Call us at 978-422-2311.
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