By financen | December 31, 2007 - 7:22 am - Posted in Debt

Your debt to income ratio is a simple way to figure out the percentage of your income available to pay your mortgage after paying other necessary expenses. This Debt to income ratio often abbreviated as DTI is one of the many things that a lender will consider before approving for a home loan.

When you approach a lender, you might have seen a conventional loan debt limit referred as 28/36 as the qualifying ratio. What does this mean? These two numbers refer to the two percentages that are used to examine two aspects of your debt load.

  • The First Number, 28%

This number indicates the maximum percentage of your monthly gross income that is allowed by a lender for your household expenses. This will include payments on the loan principal and accrued interests, private mortgage insurance, hazard insurance, property taxes, and homeowner’s association dues

  • The Second Number, 36%

This number indicates the maximum percentage of your monthly gross income that is allowed by a lender for your household expenses + recurring debt.

What are recurring debts? This will include your credit card payments, child support, car loans, and other obligations that you may not be able to pay within a short period of time.

  • Debt to Income Example

Let’s say you have a yearly gross income of $45,000. Your monthly income will stand at $3,750. From this $3,750 as your monthly income, you will be allowed 28% for your household expenses. i.e. $1,050. If you have recurring debts, you will go by 36%. This means that you will be allowed household expenses for $1,350 along with recurring debt.

Not all the loans stand with the same figures. – FHA loans are different from the home loans. They stand at 29/41. This means that they allow a higher debt load for both housing expenses and recurring debt. For VA loans, the debt to income ratio should not exceed 41% of your monthly gross income.

  • How to get approved by your lenders.

If you are interested in qualifying for a home loan, stay within the lender’s debt to income ratio limits. If you show a good overall picture of your finance, the lender may allow you to carry more debts. It’s always best to get pre-approved before you actually look around to purchase a house. This way, you will come to know the price range of your loan repayments that can fit to your budget.

Further reading:

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