Maximum Debt-to-Income Ratio for a Conventional Mortgage

Primary Debt Ratio

The primary debt ratio is calculated by adding your proposed mortgage payment to your proposed monthly payments for property taxes and homeowner's insurance and your homeowner's association dues (if applicable), and dividing by your gross monthly income. This gives you a ratio of your proposed housing debts to your gross income. Statistics show that if your ratios do not exceed limits set by your lender, there is a high probability that you will be able to pay your obligations when they are due.

The secondary debt ratio is calculated by adding all of your other monthly obligations to the total used for your primary ratio, and dividing that total by your gross income. This gives you a ratio of all of your debts to your income. These additional debts include credit card minimum payments, installment payments, auto and student loan obligations, and any other debts on your credit report. If a debt has fewer than ten months remaining, it is not included, unless it is for an auto lease. Lenders believe that when your lease is up you will lease another vehicle.

The industry standard for acceptable ratios is 28/36. This means that your primary ratio should not exceed 28, and your secondary ratio should not exceed 36. Lenders will allow exceptions for ratios up to 34/38. When sub-prime mortgages were popular, lenders would often ignore your primary ratio and approve your loan with a secondary ratio of 50 percent. These loans typically had substantial increases in their interest rates after two years, triggering the sub-prime mortgage crisis.

If you plan to apply for a mortgage loan in the near future, you should look closely at your debts and determine your proposed debt ratio. You can get a free copy of your credit report at annualcreditreport.com. If you have enough cash reserves, you might consider paying off some of your debts so that your ratios will be acceptable. You should do this about two months prior to applying for a loan, so the creditors will have plenty of time to report to the credit bureaus.