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 have been paid.
Understanding your qualifying ratio
Typically, conventional mortgage loans need 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 gross monthly income that can go to housing costs (including mortgage principal and interest, private mortgage insurance, hazard insurance, property tax, and HOA dues).
The second number is what percent of your gross income every month which can be spent on housing costs and recurring debt together. Recurring debt includes credit card payments, car payments, child support, etcetera.
Examples:
A 28/36 qualifying ratio
- 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'd like to calculate pre-qualification numbers with your own financial data, we offer a Loan Qualification Calculator.
Just Guidelines
Remember these are only guidelines. We will be thrilled to go over pre-qualification to help you figure out how much you can afford.
Northeast Bancorp of America, Inc. can answer questions about these ratios and many others. Call us: (440) 234-9660.