When it comes to your mortgage, qualification ratios may seem like something from your high school calculus class. It’s actually not rocket science. The math is simple, and the concept is sound.
Income Ratio is your total monthly housing payment as a percentage of your gross monthly income. Your total housing payment consists of principal, interest, property taxes, hazard insurance, mortgage insurance (if applicable) and any condo/co-op or association fees.
Debt Ratio is your total monthly housing payment plus any recurring monthly debts as a percentage of your gross monthly income. Other debts include all other payments such as cars, credit cards, student loans, personal loans, retirement savings loans, etc.
How High Can they Go? It varies by loan program and other factors, but the approximate range for your debt ratio is from about 33% to 43%.
Example: If your total gross income is $5,000 per month, your total housing payment plus recurring debt payments should not exceed approximately $2,150 for a 43% ratio or $1,650 for 33% ratio.
What’s Right for Me? Truth is, everyone is different. Some people are comfortable using a higher percentage of their income, and others are not. Family size, other expenses and lifestyle can all have an impact.