Debt to Income Ratio
Lenders use a ratio called "debt to income" to decide your maximum monthly payment after you have paid your other recurring loans.
About the qualifying ratio
Typically, conventional loans require 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 spent on housing costs (including loan principal and interest, PMI, 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 things like car loans, child support and monthly credit card payments.
Some example data:
- Gross monthly income of $4,500 x .28 = $1,260 can be applied to housing
- Gross monthly income of $4,500 x .36 = $1,620 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $4,500 x .29 = $1,305 can be applied to housing
- Gross monthly income of $4,500 x .41 = $1,845 can be applied to recurring debt plus housing expenses
If you'd like to run your own numbers, feel free to use our Mortgage Loan Qualification Calculator.
Don't forget these are only guidelines. We'd be thrilled to pre-qualify you to help you determine how much you can afford.
At Homewood Mortgage, Inc., we answer questions about qualifying all the time. Call us at 205-941-1484.