Your qualifying 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. There are many different types of loan programs. Each loan program will have it own rules in determining the allowable qualifying ratios. Some loan programs have no qualifying ratios.
Loan programs have set qualifying ratios such as 33/38. This means that up to 33% of your monthly income can be used for your housing expense while 38% of your monthly income can be used for your housing expense plus your other monthly payments. There are loan programs available that will allow a "back-end" ratio of 54.4%. With new technology there are now automated underwriting systems that evaluate a mortgage loan based on a number of factors including the size of the down payment and your credit scores. Some of the loan programs that use automated underwriting do not have stated qualifying ratios. For many loan programs qualifying ratios are used as guidelines.An excellent credit history or a larger down payment can help you qualify for a mortgage loan even if your debt load is over and above the limit.
Understanding the qualifying ratio
In the past many conventional loan programs had a qualifying ratio of 33/38.FHA loans allowed for a higher debt load, reflected in a higher (29/41) qualifying ratio. The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can be applied to housing (including loan principal and interest, private mortgage insurance, hazard insurance, property taxes and homeowner's association dues). The second number is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt.Recurring debt includes things like car loans, child support and monthly credit card payments.
For example:
With a 33/38 qualifying ratio:
Gross monthly income of $8,000 x .33 = $2,640 can be applied to housing
Gross monthly income of $8,000 x .38 = $3,040 can be applied to recurring debt plus housing expenses
With a 29/41 qualifying ratio:
Gross monthly income of $8,000 x .29 = $2,320 can be applied to housing
Gross monthly income of $8,000 x .41 = $3,280 can be applied to recurring debt plus housing expenses
Simply guidelines
Remember these are just guidelines. With the large number of loan options available it is best to have your situation evaluated to determine which loan program will best meet your needs. I will be happy to pre-qualify you to determine how large a mortgage loan you can afford. The pre-qualification is free. (Pre-Application Form) I look forward to helping you buy your dream home.
Qualifying Ratios
