Lenders use a ratio called "debt to income" to determine the most you can pay monthly after you have paid your other recurring debts.
Understanding your qualifying ratio
Typically, underwriting for conventional loans needs a qualifying ratio of 28/36. FHA loans are less restrictive, requiring a 29/41 ratio.
The first number in a qualifying ratio is the maximum percentage of gross monthly income that can go to housing (including loan principal and interest, private mortgage insurance, homeowner's insurance, property tax, and homeowners' association dues).
The second number is what percent of your gross income every month that can be spent on housing costs and recurring debt. Recurring debt includes payments on credit cards, auto loans, child support, etcetera.
Some example data:
- 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, please use this Loan Qualifying Calculator.
Don't forget these are only guidelines. We'd be happy to help you pre-qualify to help you figure out how much you can afford.
At Nationwide Home Loans, we answer questions about qualifying all the time. Give us a call: 5626935048.