Debt Ratios for Residential Financing
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after you have paid your other monthly debts.
Understanding your qualifying ratio
Usually, underwriting for conventional mortgage loans requires a qualifying ratio of 28/36. FHA loans are less strict, requiring a 29/41 ratio.
The first number in a qualifying ratio is the maximum percentage of gross monthly income that can be spent on housing costs (this includes principal and interest, private mortgage insurance, hazard insurance, property tax, and homeowners' association dues).
The second number is what percent of your gross income every month that should be applied to housing expenses and recurring debt together. Recurring debt includes vehicle payments, child support and credit card payments.
Examples:
28/36 (Conventional)
- 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 want to calculate pre-qualification numbers on your own income and expenses, we offer a Mortgage Loan Qualifying Calculator.
Guidelines Only
Remember these are just guidelines. We will be happy to help you pre-qualify to help you determine how large a mortgage loan you can afford.
Forum Mortgage Bancorp can answer questions about these ratios and many others. Give us a call: (773) 774-9040 Ext 121.