The debt to income ratio is a formula lenders use to calculate how much money can be used for your monthly mortgage payment after all your other recurring debt obligations are met.
How to figure the qualifying ratio
For the most part, underwriting for conventional mortgages requires a qualifying ratio of 36/50.4. An FHA loan will usually allow for a higher debt load, reflected in a higher (43/57) qualifying 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 (including mortgage principal and interest, private mortgage insurance, hazard insurance, taxes, and HOA dues).
The second number in the ratio is the maximum percentage of your gross monthly income which can be spent on housing costs and recurring debt. For purposes of this ratio, debt includes credit card payments, car payments, child support, and the like.
Some example data:
Gross monthly income of $4,500 x .36 = $1,620 can be applied to housing
Gross monthly income of $4,500 x .504 = $2,268 can be applied to recurring debt plus housing expenses
With a 43/57 (FHA) qualifying ratio
Gross monthly income of $4,500 x .43 = $1,935 can be applied to housing
Gross monthly income of $4,500 x .57 = $2,565 can be applied to recurring debt plus housing expenses
Remember these are only guidelines. We will be thrilled to help you pre-qualify to help you determine how large a mortgage you can afford.