Lenders use a ratio called "debt to income" to determine your maximum monthly payment after you have paid your other recurring debts.
Understanding the qualifying ratio
For the most part, underwriting for conventional mortgage loans needs a qualifying ratio of 28/36. FHA loans are a little less strict, requiring a 29/41 ratio.
The first number in a qualifying ratio is the maximum amount (as a percentage) of your gross monthly income that can be spent on housing (this includes loan principal and interest, PMI, hazard insurance, property tax, and HOA dues).
The second number is what percent of your gross income every month that should be spent on housing expenses and recurring debt. Recurring debt includes payments on credit cards, auto loans, child support, etcetera.
A 28/36 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 (FHA) 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
If you'd like to calculate pre-qualification numbers with your own financial data, please use this Mortgage Qualification Calculator.
Don't forget these are just guidelines. We'd be thrilled to help you pre-qualify to help you figure out how large a mortgage you can afford.
1st Credential Mortgage Inc can answer questions about these ratios and many others. Call us: (281) 778-0805.