Housing Ratio and Debt Ratio

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11/27/2004, 11:05 pm

Housing Ratio and Debt Ratio are not as complicated as they sound. They are simply percentages of your monthly income.

The Housing Ratio (typically 28) is the percentage of your income a lender will allow you to use for housing expenses. If your gross monthly income is $5,000 and the Housing Ratio is 28, then the lender will allow you 28% of the $5,000 for housing expenses when you qualify for a mortgage loan. 28% of $5,000 is $1,400.

The Debt Ratio (typically 36) is the percentage of your income a lender will allow for long term debt. Your housing expenses are long term debt, but all of your other loans and credit accounts that won’t be paid off within 10 months are considered long term debt, too. Using the gross monthly income of $5,000 mentioned above and a Debt Ratio of 36, your maximum monthly debt allowance is $1,800.

To continue this Debt Ratio example, if you have minimum monthly payments due of $900 for a couple of cars and a credit cards, you’ll have to subtract them from the $1,800 leaving only $900 for your monthly housing payment. Subtract about 10% from this for insurance and taxes and you qualify for a loan with a monthly payment (principal and interest) of $810.00.

If you want to explore your particular financial situation in terms of your Housing Ratio and Debt Ratio, the Mortgage Qualification calculator in Real Estate Calculator Suite, a Windows(r)-based collection of real estate calculators.

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