What are income and debt ratios that I hear about?
A. An Income Ratio is your total monthly housing expense divided by your gross monthly income (before taxes) and is often referred to as your “top ratio”. A Debt Ratio is your total monthly housing expense PLUS any recurring debts (i.e. monthly credit card minimum payment, car payments, or other loan payments) divided by your income. The standard underwriting guidelines suggests a maximum of 28% on the Income Ratio and 36% on the Debt Ratio, but these can vary based on the loan program, lenders tolerance, the financial strength of the borrower and the down payment amount. There are programs and lenders who are willing to allow those ratios to go all the way to 50% and above, but this needs to be discussed in detail with our team as carrying an expense burden at that level can lead to increased risk exposure.
