Debt Ratios for Home Lending
The ratio of debt to income is a formula lenders use to determine how much money can be used for a monthly home loan payment after you have met your other monthly debt payments.
How to figure the qualifying ratio
In general, conventional mortgage loans require a qualifying ratio of 28/36. An FHA loan will usually allow for a higher debt load, reflected in a higher (29/41) ratio.
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 homeowners' insurance, homeowners' dues, PMI - everything that makes up the payment.
The second number in the ratio is what percent of your gross income every month which can be applied to housing expenses and recurring debt together. Recurring debt includes payments on credit cards, car loans, child support, etcetera.
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'd like to calculate pre-qualification numbers with your own financial data, we offer a Mortgage Loan Qualification Calculator.
Just Guidelines
Remember these ratios are just guidelines. We will be happy to pre-qualify you to determine how large a mortgage loan you can afford.
At Norcal Capital Group, Inc, we answer questions about qualifying all the time. Give us a call at 6507631924.