Lenders use a ratio called "debt to income" to determine your maximum monthly payment after you have paid your other recurring debts.
Understanding your qualifying ratio
Typically, conventional loans need a qualifying ratio of 28/36. FHA loans are a little less restrictive, requiring a 29/41 ratio.
The first number is the percentage of your gross monthly income that can be spent on housing costs. This ratio is figured on your total payment, including homeowners' insurance, HOA 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. For purposes of this ratio, debt includes credit card payments, car loans, child support, and the like.
Some example data:
With 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 want to calculate pre-qualification numbers on your own income and expenses, use this Mortgage Loan Pre-Qualifying Calculator.
Remember these are just guidelines. We will be happy to pre-qualify you to help you figure out how large a mortgage you can afford.
The Mortgage Exchange Service LLC can walk you through the pitfalls of getting a mortgage. Call us at 703.255-5810.