Debt Ratios for Residential Lending
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Lenders use a ratio called "debt to income" to decide the most you can pay monthly after you've paid your other recurring loans.
Understanding the qualifying ratio
Usually, conventional mortgages need a qualifying ratio of 28/36. FHA loans are a little less restrictive, requiring a 29/41 ratio.
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 hazard insurance, homeowners' dues, Private Mortgage Insurance - everything that constitutes the full payment.
The second number in the ratio is the maximum percentage of your gross monthly income that should be applied to housing costs and recurring debt together. Recurring debt includes auto payments, child support and credit card payments.
Some example data:
A 28/36 qualifying 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 run your own numbers, please use this Mortgage Loan Pre-Qualification Calculator.
Don't forget these ratios are only guidelines. We'd be happy to help you pre-qualify to help you figure out how large a mortgage you can afford.
SquareLend can answer questions about these ratios and many others. Give us a call: 5627733870.