Debt Ratios for Residential Financing
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after your other recurring debts are paid.
Understanding the 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) ratio.
In these ratios, the first number is how much (by percent) of your gross monthly income that can be spent on housing costs. This ratio is figured on your total payment, including hazard insurance, HOA dues, Private Mortgage Insurance - everything.
The second number is what percent of your gross income every month which can be applied to housing expenses and recurring debt. Recurring debt includes credit card payments, car payments, child support, etcetera.
- Gross monthly income of $2,700 x .28 = $756 can be applied to housing
- Gross monthly income of $2,700 x .36 = $972 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $2,700 x .29 = $783 can be applied to housing
- Gross monthly income of $2,700 x .41 = $1,107 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.
Remember these are just guidelines. We will be thrilled to pre-qualify you to determine how much you can afford.
Alerus Mortgage can walk you through the pitfalls of getting a mortgage. Give us a call at 952 417 8481.