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 Debt to Income Ratio in terms of a Mortgage
Your debt to income ratio is simply a way of determining how much money is available for your monthly mortgage payment after all your other recurring debt obligations are met.
Debt limit
There is generally a debt limit associated with each type of loan, such as a 28/36 qualifying ratio for a conventional loan. These qualifying ratios are guidelines. An excellent credit history (also known as a compensating factor) can help you qualify for a mortgage loan even if your debt load is over and above the limit. Understanding the qualifying ratio Typically conventional loans have a qualifying ratio of 28/36. Usually an FHA loan will allow for a higher debt load, reflected in a higher (29/41) qualifying ratio. The first number (housing ratio) in this calculation is the maximum percentage of your gross monthly income that can be applied to housing (including loan principal and interest, private mortgage insurance, hazard insurance, property taxes and homeowner's association dues). In other words, it is only concerned with your mortgage payment or such monthly expenses directly related.
Lenders always will use your gross income for this debt to income for this calculation. If you are self employed, the means to arrive at your income will be different, but the debt to income calculation will not. The second number (total debt ratio) is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt. Recurring debt includes things like car loans, child support and monthly credit card payments. Please note that only items with a monthly payment reported to your credit or regular deductions from your paycheck (such as a garnishment or spousal support) are included in this ratio. In other words, this concerns both your housing ratio plus all monthly debts you are responsible for. Basic expenses such as food, gas etc are not included. »For example: With a 28/36 qualifying ratio: 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 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
Simply guidelines Remember these are just underwriting guidelines. There is an entire science that revolves around applying these debt to income ratios in mortgage lending, and it depends entirely on your individual situation. We’d be happy to pre-qualify you to determine how large a mortgage loan you can afford. We look forward to helping you buy your dream home. This extended contact form will allow your loan officer to better serve your needs!
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