Ratio of Debt-to-Income
Lenders use a ratio called "debt to income" to determine your maximum monthly payment after your other recurring debts have been paid.
How to figure the qualifying ratio
In general, conventional mortgages need a qualifying ratio of 28/36. FHA loans are less restrictive, requiring a 29/41 ratio.
The first number in a qualifying ratio is the maximum amount (as a percentage) of gross monthly income that can go to housing (including principal and interest, private mortgage insurance, hazard insurance, property tax, and homeowners' association dues).
The second number is the maximum percentage of your gross monthly income that should be applied to housing expenses and recurring debt. Recurring debt includes car loans, child support and monthly credit card payments.
- 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'd like to calculate pre-qualification numbers on your own income and expenses, use this Mortgage Loan Pre-Qualification Calculator.
Don't forget these are just guidelines. We will be thrilled to help you pre-qualify to help you determine how much you can afford.
Rasmussen Mortgage can answer questions about these ratios and many others. Give us a call: 608-592-5600.