Ratio of Debt-to-Income
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after your other monthly debts are paid.
About the qualifying ratio
Typically, underwriting for conventional mortgages requires 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 percentage of gross monthly income that can be applied to housing (this includes principal and interest, PMI, homeowner's insurance, property tax, and homeowners' association dues).
The second number in the ratio is the maximum percentage of your gross monthly income which can be spent on housing expenses and recurring debt together. Recurring debt includes things like auto loans, child support and monthly credit card payments.
Some example data:
28/36 (Conventional)
- Gross monthly income of $3,500 x .28 = $980 can be applied to housing
- Gross monthly income of $3,500 x .36 = $1,260 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $3,500 x .29 = $1,015 can be applied to housing
- Gross monthly income of $3,500 x .41 = $1,435 can be applied to recurring debt plus housing expenses
If you want to calculate pre-qualification numbers on your own income and expenses, feel free to use our Loan Qualification Calculator.
Just Guidelines
Remember these are just guidelines. We will be happy to go over pre-qualification to determine how large a mortgage you can afford.
Northeast Bancorp of America, Inc. can answer questions about these ratios and many others. Give us a call at (440) 234-9660.