Conventional loans (backed by Fannie Mae and Freddie Mac): Max DTI of 45% to 50%
Conventional loan debt-to-income (DTI) ratios
The maximum debt-to-income ratio (DTI) for a conventional loan is 45%. Exceptions can be made for DTIs as high as 49.9% with strong compensating factors like a high credit score and/or lots of cash reserves.
According to the Consumer Finance Protection Bureau (CFPB), 43% is often the highest DTI a borrower can have and still get a qualified mortgage. However, depending on the loan program, borrowers can qualify for a mortgage loan with a DTI of up to 50% in some cases.
There's not a single set of requirements for conventional loans, so the DTI requirement will depend on your personal situation and the exact loan you're applying for. However, you'll generally need a DTI of 50% or less to qualify for a conventional loan.
Debt-to-Income Ratio for Conventional Mortgages
Your DTI is a measure of how much of your monthly income goes toward debt payments, and it's pretty easy to calculate. Most conventional home loan qualifications require a DTI lower than 49%. Fannie Mae's guidelines, in general, prefer a DTI cap of 36% to 45%.
Even though a conventional loan is the most common mortgage, it is surprisingly difficult to get. Borrowers need to have a minimum credit score of about 640 in order to qualify—the highest minimum score of all mortgage products—and have a debt-to-income ratio of 43% or less.
Conventional Loan Requirements
It's recommended you have a credit score of 620 or higher when you apply for a conventional loan. If your score is below 620, lenders either won't be able to approve your loan or may be required to offer you a higher interest rate, which can result in higher monthly payments.
FHA loans only require a 3.5% down payment. High DTI. If you have a high debt-to-income (DTI) ratio, FHA provides more flexibility and typically lets you go up to a 55% ratio (meaning your debts as a percentage of your income can be as much as 55%). Low credit score.
Maximum DTI Ratios
For manually underwritten loans, Fannie Mae's maximum total DTI ratio is 36% of the borrower's stable monthly income. The maximum can be exceeded up to 45% if the borrower meets the credit score and reserve requirements reflected in the Eligibility Matrix.
What is the maximum allowed FHA DTI ratio? The maximum allowed FHA DTI Ratio with compensating factors is 56.9% which may be allowed by participating FHA lenders based upon some compensating factors which help to minimize the lender's risk.
The rule is simple. When considering a mortgage, make sure your: maximum household expenses won't exceed 28 percent of your gross monthly income; total household debt doesn't exceed more than 36 percent of your gross monthly income (known as your debt-to-income ratio).
Evaluating debt ratios
When the Borrower's monthly debt payment to income ratio exceeds 45%, the loan is ineligible for sale to Freddie Mac. As a guideline, the monthly debt payment-to-income ratio should not be greater than 33% to 36% of the Borrower's stable monthly income.
To qualify for a 3-percent-down conventional loan, you typically need a credit score of at least 620, a two-year employment history, steady income, and a debt-to-income ratio (DTI) below 43 percent. If you apply for the HomeReady or Home Possible loan, there are also income limits.
Cons: Why a conventional mortgage may not be right for you
The eligibility requirements for conventional loans are more stringent than government-backed loans. Conforming loans are sold to Fannie Mae or Freddie Mac soon after being created to help keep mortgages affordable for homebuyers.
While you don't need a perfect 850 credit score to get the best mortgage rates, there are general credit score requirements you will need to meet in order to take out a mortgage. Prospective home buyers should aim to have credit scores of 760 or greater to qualify for the best interest rates on mortgages.
The minimum down payment required for a conventional mortgage is 3%, but borrowers with lower credit scores or higher debt-to-income ratios may be required to put down more. You'll also likely need a larger down payment for a jumbo loan or a loan for a second home or investment property.
A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down. But an FHA loan can be perfect if your credit score is in the high-500s or low-600s. For lower-credit borrowers, FHA is often the cheaper option. These are only general guidelines, though.
The mortgage approval process can take anywhere from 30 days to several months, depending on the status of the market and your personal circumstances.
According to Brown, you should spend between 28% to 36% of your take-home income on your housing payment. If you make $70,000 a year, your monthly take-home pay, including tax deductions, will be approximately $4,530.
"House poor" is a term used to describe a person who spends a large proportion of his or her total income on homeownership, including mortgage payments, property taxes, maintenance, and utilities.
The Income Needed To Qualify for A $500k Mortgage
A good rule of thumb is that the maximum cost of your house should be no more than 2.5 to 3 times your total annual income. This means that if you wanted to purchase a $500K home or qualify for a $500K mortgage, your minimum salary should fall between $165K and $200K.
Back-end DTIs compare gross income to all monthly debt payments, including housing, credit cards, automobile loans, student loans and any other type of debt.
Your DTI ratio refers to the total amount of debt you carry each month compared to your total monthly income. Your DTI ratio doesn't directly impact your credit score, but it's one factor lenders may consider when deciding whether to approve you for an additional credit account.