Qualifying Ratios

Qualifying Ratios ## Debt-to-Income Ratios: The Core Qualifying Standard Lenders use debt-to-income (DTI) ratios to determine whether a borrower can afford a mortgage. There are two ratios used in underwriting: Housing Ratio (Front-End DTI): Monthly housing expense divided by gross monthly income. The housing expense includes PITI — Principal, Interest, Taxes, and Insurance — plus any HOA dues or mortgage insurance. Conventional lenders typically want this at or below 28%; FHA allows up to 31%. Total Debt Ratio (Back-End DTI): All monthly debt payments (housing + car payments + student loans + credit card minimums + any other installment or revolving debt) divided by gross monthly income. Conventional guidelines are typically 36–43%; FHA allows up to 43% (or higher with compensating factors). Example Calculation: - Gross monthly income: $10,000 - Monthly housing payment (PITI): $2,800 - Car payment: $350 - Student loan: $150 - Housing ratio: $2,800 ÷ $10,000 = 28% (within conventional limit) - Total debt ratio: ($2,800 + $350 + $150) ÷ $10,000 = $3,300 ÷ $10,000 = 33% (within limits) --- ## PITI Breakdown PITI is the standard way to express the full monthly housing cost: - Principal: The portion of the payment that reduces the loan balance - Interest: The lender's fee for the loan, based on the outstanding balance - Taxes: Monthly escrow amount for property taxes (approximately 1.1–1.25% of value annually in CA, divided by 12) - Insurance: Homeowner's insurance (hazard insurance), escrowed monthly For condos or planned developments, HOA dues may also be included in the qualifying payment. PMI (private mortgage insurance) is added when LTV exceeds 80%. --- ## Qualifying Income Lenders look for stable, documentable income. Key rules: - **Employment…