Prequalify for a Mortgage Loan: What are Underwriting Ratios

By Karen Lawson
Calculators for Mortgages Columnist

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You want to prequalify for a mortgage loan, but get confused when lenders mention "ratios." Typically, mortgage companies use two ratios in addition to income and credit information to prequalify you for a mortgage loan. What are Ratios and Why Should You Care?
The first ratio used by lenders calculates the estimated monthly housing payment divided by your gross monthly income. The housing payment includes monthly amounts for your estimated mortgage principal and interest payment, property taxes, and homeowners insurance (PITI) Gross monthly income is your income from all sources (before deductions for federal and state taxes, Medicare, and Social Security) calculated on a monthly basis. For conventional mortgage financing, lenders typically target a housing/income ratio of no more than 28%, but this can be quite flexible, particularly if you have a credit score of 700 or more or lots of savings. Certain types of mortgage programs including first time buyer programs and community housing programs may provide funding and/or flexibility to assist homeowners in meeting affordability requirements.  

You can include other types of income in addition to wages from employment. You do not have to disclose these types of income, but if you need help in reducing ratios in order to prequalify, here are examples of income that can be considered by mortgage lenders.  

• Alimony, child support, and public assistance payments
• Retirement, social security, disability, or veterans benefits
• Interest income, net rental income, and investment income

You Want to Prequalify. What about Debts?
The second ratio lenders use to prequalify you is the total monthly amount of PITI and monthly debt payments divided by your gross monthly income. Lenders generally prefer a debt to income (DTI) ratio of 36% or less, but again, this can be flexible. FHA loans allow for a debt to income ratio of 41%. Excellent credit scores and assets (called "reserves") can be used to prequalify borrowers with high debt ratios. When choosing a mortgage loan, it's important to consider the long term picture; a lender may help you prequalify and "get your foot in the door" of a new home, but if you ultimately can't afford payments, problems will likely follow.  

You can use a variety of free online mortgage calculators to help you get an idea of how much you can afford for monthly payments, and how much you can afford to borrow. Using an affordability calculator for doing research by in advance of asking mortgage companies to prequalify you for a mortgage is useful for determining what you need to do to get the mortgage you want.



About the Author
Karen Lawson is a freelance writer with extensive background in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.