How to Calculate Qualifying Ratios

When a lender reviews a mortgage application, the most important guidelines are the qualifying ratios. The housing ratio is the mortgage payment divided by gross monthly income. The debt ratio is the monthly debt payment divided by gross monthly income. Typically a lender a ratio consists of 28/36, though these figures can vary widely. Using these guidelines, calculate the qualifying ratio for your mortgage.

Difficulty: Challenging

Instructions

1. Divide the annual household income by 12 to get the monthly income. Multiply by the lender's housing ratio--in this case 28 percent (.28-- to get the maximum amount of principle, interest, taxes and insurance (PITI) that is affordable according to this formula.

2. Use the debt ratio of 36 percent as the multiplier (6000 x .36). Determine the PITI with consideration to all other debts: $2160.

3. Subtract outstanding monthly debt payments from $2160 to arrive at the maximum affordable PITI per this formula. Arrive at $1560 ($2160 - $600).

4. Consider the impact of debt load on the ability to take a mortgage and maximize the amount of the loan. Pay off as much debt as possible before making application for a mortgage.

5. Calculate 20 percent housing expenses to go toward insurance and taxes. Multiply $1560 x 80 percent in this scenario to find that a mortgage payment of $1248 is the comfortable maximum for this budget with the remaining $312 going to insurance and taxes.

Tips & Warnings

• Check with you lender for specific policies regarding qualifying ratios. Standards vary from lender to lender as does the lender's ability to adjust them with regard to other factors such as the size of a downpayment or interest rate.

Resources

• More about qualifying ratios