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Lenders use a ratio called "debt to income" to decide your maximum monthly payment after your other monthly debts have been paid.
About your qualifying ratio
In general, conventional mortgages require a qualifying ratio of 28/36. FHA loans are less strict, requiring a 29/41 ratio.
The first number is how much (by percent) of your gross monthly income that can be spent on housing costs. This ratio is figured on your total payment, including hazard insurance, HOA dues, PMI - everything.
The second number in the ratio is what percent of your gross income every month that should be spent on housing costs and recurring debt. Recurring debt includes vehicle loans, child support and monthly credit card payments.
Some example data:
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 (FHA) 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
If you'd like to run your own numbers, feel free to use our Loan Pre-Qualification Calculator.
Remember these are just guidelines. We will be thrilled to go over pre-qualification to determine how much you can afford.
The 1st Money Source Inc. can answer questions about these ratios and many others. Give us a call: 510-444-5626.