Analyzing Your Debt to Income Ratio: Your debt to income ratio is a way of determining how much money is available for your monthly mortgage payment after all of your other monthly debt obligations are met.
Debt limit: There is a debt limit associated with each loan type, 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 of the guidelines.
Understanding the qualifying ratio: The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can be applied toward housing (including loan principal and interest, private mortgage insurance, hazard insurance, property taxes and home owner’s association dues).
The second number is the maximum percentage of your gross monthly income that can be applied toward housing expenses and monthly recurring debt. Monthly recurring debt includes things like car loans, child support and your monthly credit card payments.
Conventional loans usually have a qualifying ratio of 28/36. Conventional loans usually require a 5% down payment for owner-occupied property and a 10% down payment for investment property. An FHA loan will allow you to have a greater debt load, with a higher (31/43) qualifying ratio. Non-conforming loans can vary from 33/38 to 55%. This type of loan applies to mortgages that does not meet the conventional loan standards. Non-conforming loans usually don’t have a front ratio requirement and have a back ratio standard of either 40% or 45% but can go up to 50%.
We will explain in the examples below:
With a 28/36 qualifying ratio (Conventional Loan):
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 monthly debt and housing expenses combined
With a 50% back qualifying ratio (Non-Conforming Owner Occupant Loan):
Gross monthly income of $3,500 x .50 = $1,750 can be applied to recurring debt and housing expenses combined
With a 40% back qualifying ratio (Non-Conforming Investor Loan):
Gross monthly income of $3,500 x .40 = $1,400 can be applied to recurring debt and housing expenses combined
Please note: 75% of the gross rent indicated on a lease less the mortgage payment is normally used as the net income for a rental property. Add this amount to the gross employment income. Using this example, a rental property leased for $1000 per month that has a monthly payment of $750 will have no impact on the debt ratio. A higher lease amount or a lower payment will decrease the borrower’s debt ratio which could help with qualifying for the loan.
Calculate your debt ratio: Income – Note that income typically needs to be received for the past 2 years and expected to continue for 3 more years to be counted. Net rent only applies if you own investment property.
Base Employment: $
Overtime Employment: $ (if you had it for the past 2 years)
Net Rent: $ (All lease amounts x 75% minus payments)
Other Income: $ (Alimony, Pension, etc.)
Debts – Note that installment debt such as car loans normally can be ignored if they have no more that 10 months of remaining payments. If buying a primary residence or refinancing, the new payment will be used for the ratio calculation. Also add the HOA fee if applied.
Current Residence: $ (either a mortgage payment or rent)
Car Payments: $
Student Loans: $
Credit Cards: $ (use minimum payments or 2% of balances)
Other Debts: $ (Alimony, Child Support, etc.)
Front Ratio: % (Current Residence Payment divided by Total Income)
Back Ratio: % (Total Debt divided by Total Income)