Wednesday, September 10, 2014

Mortgage Application Tips #3 - Debt to Income Ratio

The debt to income ratio is a formula lenders use to determine how much of your income is available for a monthly mortgage payment after you meet your other monthly debt payments. This is an important aspect of the mortgage application process. Without a good number, you won't be able to qualify for your new home.

About your qualifying ratio:

Typically, underwriting for conventional mortgages requires 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 percentage of gross monthly income that can be applied to housing (this includes mortgage principal and interest, private mortgage insurance, hazard insurance, property tax, and homeowners' association dues).

The second number in the ratio is the maximum percentage of your gross monthly income that should be applied to housing costs and recurring debt together. For purposes of this ratio, debt includes payments on credit cards, auto/boat loans, child support, and the like.

For example: 


28/36 (Conventional):
Gross monthly income of $8,000 x .28 = $2,240 can be applied to housing
Gross monthly income of $8,000 x .36 = $2,280 can be applied to recurring debt plus housing expenses

With a 29/41 (FHA) qualifying ratio :
Gross monthly income of $8,000 x .29 = $2,320 can be applied to housing
Gross monthly income of $8,000 x .41 = $3,280 can be applied to recurring debt plus housing expenses

Remember these are only guidelines. We will be happy to pre-qualify you to help you determine how much you can afford. Give us a call at 877-828-8851.

Be sure to view last week's article about proving your employment and income for a home loan.

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