The Truth of Credit

The 28/36 ratio is the standard formula used by mortgage lenders to calculate your mortgage affordability.  It consists of your debt to income ratio, and is a figurative way of determining how much of your income should go toward your monthly mortgage payment after all your other monthly debts are paid. There is generally a debt limit associated with different types of mortgages, such as the 28/36 qualifying ratio associated with conventional loans.

The first number in a qualifying ratio is the maximum percentage of your monthly income that should be applied to your housing payment. When we say monthly income, we mean your gross monthly income before any withholding taxes are removed. Your housing payment includes the loan principal and interest, hazard insurance, and property taxes. Your housing payment does not include utility bills like telephone, natural gas/electrical service, or cable TV.

The second number in the ratio is the maximum percentage of your gross monthly income that underwriters will allow to be applied to your housing payment plus your “recurring debt.” Recurring debt includes any debt (not utility bills) that you’re are required to pay each and every month. This includes installment loans like car loans or student loans. It also includes alimony, child support and revolving credit card payments. Even if you pay off your credit card statement every month, the underwriter will include a minimum payment in the ratios whether you like it or not.

The TRUTH is that qualifying ratios are guidelines that mortgage lenders have used for years to calculate the loan amount you can receive. Although current underwriting software has modified the need for these ratios a great deal, every underwriter eventually approves your loan based on what percentage of your income is going toward your house payment.

Quick Example:

Gross monthly income of $2,500 x .28 = $700 can be applied to your housing payment.

Gross monthly income of $2,500 x .36 = $900 can be applied to housing payment plus recurring debt.

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