A: The standard rule for most lenders is that your debt-to-income ratio should be no higher than 36 percent. In other words, when you add up all of your regular monthly debts such as car, mortgage and credit card payments (minimum required payments -- not the full outstanding balance) and divide that amount by your total gross monthly income, you should get a number that is less than 36. Lenders also like the total of your housing expenses alone to not exceed 28 percent.
Some lenders will provide loans to those with a higher debt-to-income ratio, but the loans may be smaller than they’d normally offer or they may charge higher mortgage rates on the borrowed money. Federal Housing Authority Loans allow a debt-to-income ratio of up to 41 percent, but require that you pay an additional monthly fee for mortgage insurance. Remember, just because you can get a loan with a high debt-to-income ratio does not mean you should. It may be better for you to borrow a lesser amount of money.
Your best bet is to try to pay down as much outstanding debt as possible before applying for a mortgage or line of credit. You can also reduce the cost of high-interest monthly credit card payments by applying for a lower-interest debt consolidation loan.Dan Moore
Vice President, Product Management