How to Calculate the Qualifying Ratio for a Home Loan

One of the main factors in qualifying for a mortgage loan is the debt-to-income ratio. All lenders have slightly different guidelines. Different loan programs also recommend higher or lower debt-to-income guidelines. If you are in the market to buy a home or are considering refinancing, it will be helpful to know how to calculate the ratio yourself. It also will be useful to have a general idea of what number lenders are looking for.

Computing Debt-to-Income Ratio

To figure out your debt-to-income ratio, first add up all your monthly debt obligations including the new mortgage. This would include car loan payments and minimum payments on credit cards and student loans. Be sure to include any taxes, insurance and homeowner’s dues in the proposed mortgage payment. Once you have a total, divide that number by your gross monthly income (before taxes). For example, if you make $5,000 per month, and your total debts plus the proposed mortgage equals $2,000, your debt-to-income ratio is 40 percent.

Qualifying Ratio Varies

The next question is what would qualify a prospective buyer for a mortgage. This is not a simple answer in the current mortgage environment, but for the purposes of estimating what you will be able to qualify for, there are some good benchmarks to apply. For most conventional, Fannie Mae loans, a borrower with good credit and at least a 20 percent down payment can qualify with a debt-to-income ratio up to 45 percent. FHA loans will usually go up to a maximum of 50 percent.

Automated Underwriting

Both Fannie Mae and Freddie Mac have electronic underwriting approval systems. These are used by most lenders to determine qualification and approval. FHA also allows their loans to be run through the Fannie Mae system (Desktop Underwriter). These programs look at all the strengths and weaknesses of a potential borrower: income, credit, assets and property value. Borrowers with weaker credit profiles, and not much as far as liquid assets, probably won’t qualify for a conventional mortgage with a debt-to-income ratio of 45 percent, even if the program allows for it.

Investor Overlays

The mortgage investors (Fannie Mae, Freddie Mac, FHA) consider certain lenders to be a higher or lower risk depending on their history of loan quality. For a lender with a history of poor loan quality, the automated underwriting system will be programmed with “overlays,” meaning a borrower will need to be stronger in order to qualify. Borrowers with more marginal debt-to-income ratios should apply with lenders who have direct Fannie Mae and Freddie Mac approval and who have a good record with these major mortgage investors.

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About the Author

With more than a decade of experience, Gregory Erich Phillips is a trusted expert on real estate and mortgage financing. As an author, Phillips is known for his writings on economics, personal finance, religion, politics and culture.

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