Lenders use a ratio called "debt to income" to determine your maximum monthly payment after your other monthly debts are paid.
Understanding the qualifying ratio
Most underwriting for conventional mortgages needs 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 is how much (by percent) of your gross monthly income that can go toward housing costs. This ratio is figured on your total payment, including homeowners' insurance, homeowners' dues, Private Mortgage Insurance - everything that makes up the payment.
The second number in the ratio is what percent of your gross income every month that should be spent on housing costs and recurring debt together. Recurring debt includes things like auto payments, child support and credit card payments.
Some example data:
A 28/36 ratio
- Gross monthly income of $6,500 x .28 = $1,820 can be applied to housing
- Gross monthly income of $6,500 x .36 = $2,340 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $6,500 x .29 = $1,885 can be applied to housing
- Gross monthly income of $6,500 x .41 = $2,665 can be applied to recurring debt plus housing expenses
If you want to calculate pre-qualification numbers with your own financial data, use this Mortgage Loan Qualifying Calculator.
Remember these are just guidelines. We will be happy to go over pre-qualification to help you determine how much you can afford.
Bright Vision Mortgage can answer questions about these ratios and many others. Give us a call: (904) 342-3622.