Ratio of Debt-to-Income
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after your other recurring debts are paid.
About your qualifying ratio
Usually, 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 in a qualifying ratio is the maximum amount (as a percentage) of your gross monthly income that can be applied to housing (this includes mortgage principal and interest, PMI, hazard insurance, property taxes, and homeowners' association dues).
The second number in the ratio is what percent of your gross income every month which can be applied to housing expenses and recurring debt together. Recurring debt includes auto/boat payments, child support and monthly credit card payments.
With a 28/36 ratio
- 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 run your own numbers, use this Loan Pre-Qualification Calculator.
Remember these are just guidelines. We'd be thrilled to go over pre-qualification to help you determine how large a mortgage you can afford.
At Real Property Finance, we answer questions about qualifying all the time. Give us a call at 310-379-5997.
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