Debt to Income Ratio

When applying for a home loan, borrowers hear a lot about something called debt-to-income ratio.  Debt-to-income ratio is a guideline that compares a borrower's monthly debt payments to gross monthly income and helps lenders determine if you meet qualifications. 


How to figure your qualifying ratio

Typically, conventional loans need a qualifying ratio of 28/45. FHA loans are a little less restrictive, requiring a 29/45 ratio. However, in some cases we have seen FHA approve a 37/55 ratio. Don't let ratio alone revert you to renting.

The first number in a qualifying ratio is the maximum percentage of gross monthly income that can go to housing costs (this includes mortgage principal and interest, private mortgage insurance, homeowner's insurance, property tax, and homeowners' association dues).

The second number in the ratio is what percent of your gross income every month that should be applied to housing costs and recurring debt. For purposes of this ratio, debt includes credit card payments, vehicle loans, child support, et cetera.

* VA lenders look for a DTI of 41 percent but evaluate it a bit differently than the other major lending avenues (FHA, USDA, conventional). VA Lenders consider only one ratio, which factors in all of the borrower's monthly debt, from housing costs and revolving debts to anything else that's pertinent.  The other major loan options calculate two separate DTI ratios, one solely for housing expenses and a second, holistic tally. You might hear them called front-end and back-end ratios respectively. The VA only considers the back-end ratio.

** USDA has a hard stop on their back-end ration of 41 percent.

Some example data:

28/45 (Conventional)

  • Gross monthly income of $6,500 x .28 = $1,820 can be applied to housing
  • Gross monthly income of $6,500 x .45 = $2,925 can be applied to recurring debt plus housing expenses

With a 29/45 (FHA) qualifying ratio

  • Gross monthly income of $6,500 x .29 = $1,885 can be applied to housing
  • Gross monthly income of $6,500 x .45 = $2,925 can be applied to recurring debt plus housing expenses

 

If you want to calculate pre-qualification numbers on your own income and expenses, we offer a Mortgage Loan Qualification Calculator.

Don't forget these are just guidelines. We'd be happy to help you pre-qualify to help you determine how much you can afford. At Prestige Home Mortgage, we answer questions about qualifying all the time. Give us a call: 360-576-1920. Ready to begin? Apply Here.

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