The second number, 36%, refers to the maximum percentage of your gross monthly income that the lender will consider for housing expenses plus recurring debt. Recurring debt includes credit card payments, child support, car loans, student loans, and other obligations that are not paid back in a relatively short period of time, usually six to ten months.
Here is an example: Annual Gross Income: $ 45,000. Divide this by 12 for a monthly income of $ 3,750.
$ 3,750 x .28 $ 1,050 allowed for housing expenses.
$ 3,750 x .36 $ 1,350 for housing expenses plus recurring debt.
$ 1,350 minus $ 1,050 leaves only $ 300 per month to cover all debt except mortgages. This explains why a family with large student loans plus credit card debt will not be able to buy a home with traditional financing.
The Federal Housing Administration loan ratios are typically 29/41, which allows for a higher debt burden for both housing costs and recurring debt. For a Department of Veterans Affairs loan, the debt to income ratio should not exceed 41% of gross monthly household income.
Meeting the lender’s debt-to-income ratio limits is only part of qualifying for a home loan. However, most lenders have some leeway.
If the overall picture looks good and the average creditworthiness of borrowers is high, a lender may be able to allow you to take on more debt. Or he or she suggests alternatives like paying a larger deposit or finding a co-signer (never recommended by your humble columnist as it is dangerous for both co-signers).
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