How To Calculate the Mortgage Payment to Income Ratio
Calculating the ratio of mortgage payment expense to effective income is relatively straightforward, once you know which things to include and which to leave out.
First, calculate the total mortgage payment. This number should include principal and interest, payments to escrow accounts used for paying taxes, and required homeowners association dues or other mandated assessments. In addition, mortgage insurance premiums are included in the total mortgage payment as a monthly expense regardless of how the premiums are actually paid.
Once the total mortgage payment has been calculated, divide that number by the gross monthly income of the borrower. In case of a joint mortgage, the income of both borrowers is added together.
The resulting percentage is the mortgage payment to income ratio.
Although FHA insured loans require the ratio to be less than 29 percent, private lenders are free to set their own maximum ratios, or to use different ratios altogether.
Most financial planners and budget counselors recommend keeping monthly housing payments below 30 percent of income, so the maximum FHA ratio is not only a requirement for many loans, but a good rule of thumb for how high your mortgage payment should be.