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Understanding Debt to Income Ratios for Mortgages

Allison Beatty
LoanBiz Columnist

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Many California home shoppers walk into "open houses" without a clear idea of what mortgage amount they can afford. They then fall in love with a home with an unrealistic mortgage requirement. To avoid this home loan scenario, look first at your debt to income ratio, which is an important criteria for mortgage lenders.

Mortgage Amount Guided By Debt to Income Ratio

Your debt to income ratio is important because it tells a California mortgage lender how much money you'll have left for mortgage payments after meeting other financial obligations. The ratio is one important part of the mortgage loan approval process, along with information on your:
  • Credit history
  • Credit score
  • Income and savings
  • Employment outlook

Conventional Loan Debt Limits

As you talk with California mortgage lenders, you'll hear the term "28/36." Those numbers are percentages used to weigh your debt load. The 28 percent refers to your monthly gross income available for home expenses. The total typically includes:
  • Mortgage loan payments, including principal and interest
  • Private mortgage insurance (if applicable)
  • Home owners insurance
  • Property taxes
  • Home owner's association dues (if applicable)

Understanding the 36 Percent Figure for Mortgage Financing

The second number is the maximum percentage of your monthly gross income the mortgage lender allows for home expenses – plus recurring debt. If you have credit card payments or car loans, for example, those would be counted as part of the 36 percent. Other debt to include is:
  • Child support
  • School loan payments
  • Long-term medical bills

Mortgage Loan Example

If your yearly gross income is $40,000, then your monthly income is $40,000 divided by 12 or $3,333. Your monthly income multiplied by .28 is $934. When multiplied by .36 the figure is $1,200. Your debt to income ratio is an important indicator of how much mortgage you can afford. Remember that these percentages are for conventional home loans. FHA loan limits often are 29/41, allowing a higher debt load.

About the Author
Allison E. Beatty is a syndicated real estate writer who has been writing home improvement columns for 15 years.

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