Debt/Income Ratio
Lenders use a ratio called "debt to income" to decide the most you can pay monthly after your other monthly debts have been paid.
About the qualifying ratio
Most underwriting for conventional 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) qualifying ratio.
The first number is how much (by percent) of your gross monthly income that can be spent on housing. This ratio is figured on your total payment, including hazard insurance, homeowners' dues, PMI - everything that constitutes the payment.
The second number in the ratio is the maximum percentage of your gross monthly income that can be applied to housing costs and recurring debt. Recurring debt includes payments on credit cards, auto loans, child support, and the like.
Some example data:
With 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 want to run your own numbers, feel free to use our very useful Mortgage Loan Pre-Qualification Calculator.
Guidelines Only
Remember these are just guidelines. We'd be thrilled to pre-qualify you to help you figure out how much you can afford.
PREMIERE MORTGAGE SERVICES, INC. can walk you through the pitfalls of getting a mortgage. Give us a call: 978-422-2311.