The Best Debt-To-Income Ratio for a Home Loan

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As a general rule, the lower your debt-to-income ratio the better, from the perspective of a mortgage lender. Having a relatively low debt-to-income ratio when you apply for a home loan means you have more capacity to take on new debt. This makes you more likely to get a loan, and potentially increases the amount of the loan for which you qualify.

Debt-to-Income Basics

Debt-to-income is a common ratio used by mortgage lenders that compares your monthly debt obligations to your gross monthly income. It offers a glimpse of how leveraged you already are when seeking a new home loan. Conventional mortgage lenders typically operate with a standard maximum ratio of 36 percent, according to Lending Tree. This means that your monthly debt, including car loans, personal loans, and credit card debt, should not exceed 36 percent of your income.

FHA Debt-to-Income

The Federal Housing Authority (FHA) is one of the largest government-sponsored loan programs, operating under the U.S. Department of Housing and Urban Development (HUD). FHA loans offer borrowers access to loans with a minimum down payment requirement of just 3.5 percent, according to HUD. This is a riskier proposition for the FHA lender, so homeowners are required to carry FHA mortgage insurance, which covers payments if the homeowner loses a job involuntarily. Because FHA loans typically include a monthly mortgage insurance installment, debt-to-income guidelines are slightly higher at 41 percent, to allow for the increased mortgage obligation.

Mortgage-to-Income Ratio

Another common debt ratio that is often used in combination with the debt-to-income ratio is a mortgage-to-income ratio. This considers only your home loan payment as a percentage of your gross monthly income. Conventional lenders want a mortgage-to-income ratio at or below 28 percent. Again, because of the mortgage insurance requirement, FHA loans have a slightly higher cap on this ratio, of 29 percent. This means no more than 29 percent of your gross monthly income should apply to your house payment with FHA loans.

Other Considerations

While the FHA and other government-backed loan programs typically have hard rules on debt-to-income ratios, conventional lenders are sometimes flexible. For instance, if you make a down payment in excess of the 20 percent mortgage lenders usually require, they are less concerned with your debt ratios, as you are making a significant investment in the home. As the potential borrower, you need to consider your own finances relative to these ratios. If you have uncommon income sources or assets that give you financial flexibility, you might get by if a lender allows you to stretch a bit. However, if you pay expenses not often considered in ratio calculations, like alimony, child support, or substantial charitable contributions, you might opt for a lower debt-to-income ratio.


About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.

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