Debt Ratios for Residential Financing
Lenders use a ratio called "debt to income" to decide the most you can pay monthly after your other monthly debts have been paid.
Understanding the qualifying ratio
In general, underwriting for conventional mortgages needs a qualifying ratio of 28/36. FHA loans are a little less strict, requiring a 29/41 ratio.
The first number in a qualifying ratio is the maximum amount (as a percentage) of gross monthly income that can be spent on housing costs (including loan principal and interest, private mortgage insurance, hazard insurance, taxes, and homeowners' association dues).
The second number is the maximum percentage of your gross monthly income that should be spent on housing expenses and recurring debt together. Recurring debt includes auto loans, child support and monthly credit card payments.
Examples:
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 with your own financial data, we offer a Loan Pre-Qualification Calculator.
Guidelines Only
Don't forget these ratios are only guidelines. We'd be thrilled to go over pre-qualification to help you determine how large a mortgage you can afford.
At New Millennium Mortgage Co. NMLS: 331173, we answer questions about qualifying all the time. Call us: (941) 366-5800.