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.  In the past, a 28/36 qualifying ratio for a conventional loan was typical. However, with computer sophistication and the subsequent ability of lenders and investors to more extensively analyze risk, ratios of 45% to 50% on some loan programs are possible. 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 first mortgage loans have a qualifying ratio of 45%. This means that a lender will consider 45% of a borrower(s) gross monthly income to service principal, interest, taxes, homeowner's insurance (or homeowner's association dues), PMI and all other consumer debt, including alimony and child support.

An example of this ratio being applied for prequalification is as follows: 

• Consider gross monthly income of $8,333 (joint income). When multiplied by 45%, the result is $3,750. That is the total amount an underwriter might consider to service all of the minimum monthly payments as described above.
• Subtract from that result estimated monthly taxes of $300 and homeowner's insurance of $50, and you are left with $3,400.
• Now deduct car payments, student loans, credit cards, alimony and child support, if applicable, of $750, and there is $2,600 per month left to pay principal and interest on a new mortgage loan.
• When divided by a monthly interest rate factor (for instance 6.50% is $6.32), a borrower might be eligible for a loan amount of $419,300. These calculations usually surprise most borrowers.

Simply Guidelines

Remember these are just guidelines. Other loan eligibility factors such as credit, assets, the loan to value ratio, etc., are also considered when calculating the allowable maximum debt ratio. Also, stated income and no-doc loan programs change debt ratio implications. 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.