Debt Ratios for Residential Lending
The debt to income ratio is a tool lenders use to calculate how much money can be used for your monthly home loan payment after all your other monthly debt obligations are fulfilled.
Understanding your qualifying ratio
For the most part, underwriting for conventional mortgages needs 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.
For these ratios, the first number is the percentage of your gross monthly income that can be spent on housing. This ratio is figured on your total payment, including homeowners' insurance, homeowners' dues, PMI - everything that constitutes the full payment.
The second number is the maximum percentage of your gross monthly income which can be spent on housing costs and recurring debt. Recurring debt includes auto payments, child support and credit card payments.
For example:
28/36 (Conventional)
- 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 on your own income and expenses, we offer a Mortgage Loan Qualification Calculator.
Just Guidelines
Remember these are only guidelines. We'd be happy to pre-qualify you to help you determine how much you can afford.
Riviera Funding NMLS#861382 CA DRE Broker #01186669 can answer questions about these ratios and many others. Call us at 3103737406.