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Mortgage Ratios

Lenders calculate income ratios as an important criteria in determining your credit worthiness. Before credit scoring models were developed, financial ratios were the leading criteria for approving a mortgage application.

Conservative lenders may have fixed ratio criteria such as "28, 36" for a mortgage to be approved. That is, 0.28 or less on the Housing Ratio and 0.36 or less on the Debt Payments Ratio. In the example below (25, 37), a rigid lender may not approve a mortgage (or may require the person applying to pay off a credit card before the mortgage is approved). In general, a high credit score may greatly influence a lenders approval decision and "30, 38" may be acceptable for instance.

To lower your Housing Ratio favorably, one has to buy a house of lesser value or be approved for a very low interest rate. To reduce your Debt Payments Ratio favorably, one has to pay off some debt.

It's a good idea to know your own ratios and your credit score before applying for a mortgage.


Monthly Housing Ratio


(Mortgage + Property Taxes + Property Insurance) / Monthly Income ($895 + $210 + $75) / $4,700 = 0.25

Note: For a condominium, add Condo Fee(s) to Monthly Payments


Monthly Debt Payments Ratio

(Housing Payments Above + Auto Loan + Credit Cards + Alimony + All Other Debt) / Monthly Income

($895 + $210 + $75 + $325 + $250 + $0 + $0) / $4,700 = 0.37

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