Debt to Income Ratio


Your debt to income ratio is simply a way of determining how much money is available for your monthly mortgage payment after all your other recurring debt obligations are met.




Debt limit

There is generally a debt limit associated with each type of loan, such as a 28/36 qualifying ratio for a conventional loan. These qualifying ratios are guidelines. An excellent credit history can help you qualify for a mortgage loan even if your debt load is over and above the limit.



Understanding the qualifying ratio

Typically conventional loans have a qualifying ratio of 28/36. Usually an FHA loan will allow for a higher debt load, reflected in a higher (29/41) qualifying ratio.



The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can be applied to housing (including loan principal and interest, private mortgage insurance, hazard insurance, property taxes and homeowner's association dues).



The second number is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt. Recurring debt includes things like car loans, child support and monthly credit card payments.





For example:



With 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 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
Simply guidelines

Remember these are just guidelines. We’d be happy to pre-qualify you to determine how large a mortgage loan you can afford. We look forward to helping you buy your dream home.

-Nato Ruiz

Tue Jun 24 2008, 17:44

It all depends so much on your situation, if you are two people with no kids and little to no debt, you can have a higher dept to income ratio than if you have 2 kids and greater debts. Generally lenders top out at 40%, however I have seen higher...up to 48%. Which in my opinion is much to high even for 2 people with no debt and no kids.

Sit down and go over your finances, figure out how much you can afford each month for your mortgage, taxes, insurance and upkeep and take it from there.

Tue Jun 24 2008, 17:42

Jenn

The Debt to Income Ratio is exactly how it sounds. I just love all the people in my industry who talk in mortgageese and does not explain it to the consumer. Here is how it works, and get out your calculator. 1st, add up all your debts that would show up on your credit: This would be car payments, credit cards, stubdent loans, etc. that is your debt. Write that figue down. Now add up your gross income, this is your income before all the deductions such as benefits, taxes 401k, savings etc. write that figure down. Now take the debt figure and divide it by the gross income figure and that will give you your debt to income ratio. It basically tells a bank how much debt you have to pay each month for every dollar you earn. Also do not forget to add in the new mortgage debt into the figure. Now there is no exact debt to income figure you have to reach, but the lower it is the less risky the loan is to the bank. I have approved loans for borrowers who debt to income ratio was like 60%.

Tue Jun 24 2008, 17:39

Debt to income = total debt divided by total income.

Income is your before tax, gross income amount

There are 2 different ratios a lender will look at. The housing ratio, of housing expense to income and the total debt to income ratio. Most loan programs cap out your total debt to income ratio around 36-39%. However, many borrowers feel that while they qualify to acquire that much debt, they aren't comfortable with that debt ratio, and feel they will be house poor, and/or live paycheck to paycheck.

This is a very personal decision, regarding what level of debt you are willing to take on. Another ratio that is good to look at is your take home pay to debt ratio. Are you comfortable with your disposable income and savings after paying your bills?

Tue Jun 24 2008, 17:36