Lenders use a ratio called "debt to income" to determine the most you can pay monthly after you've paid your other recurring loans.
Understanding the qualifying ratio
Usually, conventional mortgages require a qualifying ratio of 28/36. An FHA loan will usually allow for a higher debt load, reflected in a higher (29/41) qualifying ratio.
In these ratios, the first number is the percentage of your gross monthly income that can be spent on housing. This ratio is figured on your total payment, including hazard insurance, homeowners' dues, Private Mortgage Insurance - everything.
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. Recurring debt includes credit card payments, car loans, child support, and the like.
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 (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 on your own income and expenses, feel free to use our Mortgage Qualification Calculator.
Don't forget these are only guidelines. We will be happy to pre-qualify you to help you figure out how large a mortgage loan you can afford.
At VSI Home Lending, we answer questions about qualifying all the time. Give us a call at (260) 338-2561.