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What is my Debt to Income Ratio?

Debt to Income Ratio

 

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 (Not necessarily a hard and fast rule)

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 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 30/40. Usually an FHA loan will allow for a higher debt load, reflected in a higher (35/43) qualifying ratio.

 

The first number in a qualifying ratio 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).

 

The second number 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.

 

 

For example: 

 

With a 30/40 qualifying ratio:

 

• Gross monthly income of $3,500 x .30 = $1,050 can be applied to housing, which includes: (PITI) principle and interest, taxes, all insurance, and HOA if required.          
• Gross monthly income of $3,500 x .40 = $1,400 can be applied to recurring debt plus housing expenses. (That $1,400 must support all recurring debt not including household expenses, such as cable, telephone, and utilities)

 

With a 35/43 qualifying ratio:

 

• Gross monthly income of $3,500 x .35 = $1,225 can be applied to housing, which includes: (PITI) principle and interest, taxes, all insurance, and HOA if required.
• Gross monthly income of $3,500 x .45 = $1,575 can be applied to recurring debt plus housing expenses. (That $1,575 must support all recurring debt not including household expenses, such as cable, telephone, and utilities)

 

 

Remember these are simply guidelines (There are exceptions to most rules)

Remember these are just guidelines. 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.