Debt Ratios for Residential Financing

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The ratio of debt to income is a tool lenders use to calculate how much of your income can be used for your monthly home loan payment after all your other monthly debts are met.

About the qualifying ratio

Most conventional mortgages require a qualifying ratio of less than 45% of your gross income.  Gross income is your average monthly income before taxes and any other deductions are taken out. Some people with less-than-perfect credit may have to qualify with a smaller debt-ratio than 45%.  This typically happens when the loan is not eligible to be approved through the investor's automated decision engine and requires the lender's underwriter to manually underwrite the loan.  

An FHA loan will usually allow for a higher debt load, reflected in a higher ratios but this decided on a case-by-case basis.  We have seen ratios as high as 50% if the borrower has good compensating factors (high savings, great credit, etc).

When looking at debt-ratios, there is the front-end ratio and the back-end ratio.  The first number is how much (by percent) of your gross monthly income that can be spent on housing. This ratio is figured on your total payment, including homeowners' insurance, homeowners' dues, property taxes, homeowner's insurance and Private Mortgage Insurance - everything.

The second number is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt together. Recurring debt includes credit card payments, vehicle loans, child support, and the like.  This does not include things like utility bills you pay on your own like cell phones or gas/electricity.

Some example data:

45% (Conventional)

  • Gross monthly income of $6,000 x .45 = $2,700 can be applied to recurring debt plus housing expenses

Lets assume you have the following liabilities or debt:
Car Loan $450
Credit Card Minimum Monthly Payment $25
Student Loan Payment $150
Total $625 

New Mortgage: $1,680
Total Other Debt:  $   625
Total  $2,305  
        (This is less than the $2700 above so this means you would qualify for a loan.)

With a 29/41 (FHA) qualifying ratio

  • Gross monthly income of $6,000 x .29 = $1,740 can be applied to housing
  • Gross monthly income of $6,000 x .41 = $2,460 can be applied to recurring debt plus housing expenses

 

If you want to run your own numbers, feel free to use our very useful Mortgage Loan Pre-Qualification Calculator.

Remember these ratios are just guidelines. We will be thrilled to go over pre-qualification to help you determine how large a mortgage loan you can afford. Cha Mortgage Company can walk you through the pitfalls of getting a mortgage. Call us: 503-753-7577.

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