In conventional financing, what do the traditional 28% and 36% income ratios represent?

In conventional financing, the traditional 28% and 36% income ratios serve as guidelines for assessing loan approval based on a borrower's financial stability and capacity to repay the loan. The 28% ratio typically indicates that no more than 28% of a borrower's gross monthly income should be allocated toward housing expenses, such as mortgage payments, property taxes, and homeowners' insurance. Meanwhile, the 36% ratio encompasses total debt obligations, suggesting that total monthly debt payments (including housing expenses plus other debts like credit cards and auto loans) should not exceed 36% of gross monthly income.

These ratios help lenders evaluate the risk of lending to a borrower and ensure they are not overextending themselves financially. They reflect a lender's standard practices for determining acceptable borrowing levels, enabling them to make informed decisions regarding loan approvals. Unlike strict limits or specific minimum requirements, these ratios can vary based on lender policies and other factors, providing a flexible framework within which financial assessments are conducted. Other options, such as maximum allowable debt-to-income ratios or credit score requirements, do not capture the comprehensive role these ratios play in the assessment process.