Debt to Income Ratio
Lenders use a ratio called "debt to income" to decide the most you can pay monthly after you have paid your other monthly loans.
Understanding the qualifying ratio
Typically, conventional mortgage loans need a qualifying ratio of 28/36. FHA loans are less strict, requiring a 29/41 ratio.
For these ratios, the first number is the percentage of your gross monthly income that can be spent on housing costs. This ratio is figured on your total payment, including homeowners' insurance, HOA dues, Private Mortgage Insurance - everything that makes up the full payment.
The second number is the maximum percentage of your gross monthly income which can be applied to housing expenses and recurring debt. Recurring debt includes credit card payments, vehicle payments, child support, etcetera.
Some example data:
With a 28/36 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 on your own income and expenses, please use this Loan Pre-Qualifying Calculator.
Remember these ratios are only guidelines. We will be thrilled to help you pre-qualify to determine how much you can afford.
Utah Funding can answer questions about these ratios and many others. Give us a call: (949) 486-3777.