Home Mortgage Loans

What is a Mortgage Debt Ratio?


One of the main issues when refinancing or getting a home equity loan, is meeting the debt ratio requirement as required by the lender. It can be the deciding factor between getting a loan approval or being declined. 

The debt to income ratio is calculated by dividing your total monthly debt payments by your gross monthly income before taxes are deducted. Your monthly debts would include all financial obligations that appear on your credit report which will not be paid off with the proceeds of the refinance or home equity loan.

If you are going to pay off credit cards or other loans, those payments are not included in the ratio. If you have an existing home equity loan, second mortgage, or line of credit, it must be paid off with the proceeds of the new loan, and the new loan payment would be included.

The maximum debt ratio allowed for a conventional refinance is about 36% of gross income for all monthly debt payments. For an FHA loan, the maximum is 41%, and a home equity loan can typically range from 40% to 45%, depending on the loan to value, credit scores, and the lender. Higher debt ratios may be allowed with certain compensating factors, such as, higher credit scores, lower loan to value, or good job stability.  

Determining your income depends on how you are paid. If you are paid weekly, multiply the gross amount times 52 and divide by 12. If paid every two weeks, multiply times 26 and divide by 12. For overtime, bonus pay, or self employment, average the last two years, plus the year to date. Only include the income of the persons who are listed on the property title.