Mortgage Debt Ratios

December 11th, 2009

Debt ratios are what banks use to qualify a mortgage borrower. Your debt ratio is what percentage of your gross income a bank will allow you to spend on a new mortgage combined with your existing debts. However, if you are self-employed they use net income.

The debts that a bank will count against you are car loans, student loans, credit card debt, the new mortgage you are qualifying for, and any other mortgage debt you may have. They do not count debts like auto insurance, utilities, cell phone bills, etc.

Fannie Mae usually has a maximum debt ratio of 45% with exceptions to 50% with compensating factors. But that changes based on many variables, and should only be used as a guideline.

To put debt ratios into perspective, if you can potentially spend up to 45% of your gross income for a new mortgage combined with other debt that means they are leaving you 55% for other debt.

And other debts consist of:
federal income taxes
state income taxes
Medicare
Social Security
savings
eating out
groceries
travel
gifts
etc.

You can see how the remaining 55% would get quickly eaten up.

When I first got into the mortgage business in 1986 debt ratios maxed out at 36%, and with compensating factors you could go higher, like 40%-42%.

Where will debt ratios go next? The bottom line is that you should do your own analysis and be comfortable in what you are spending on a new home and be confident in your ability to pay your debt.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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