Why ratios exist
Underwriting asks whether the borrower can carry this payment out of real income. Ratios are the shorthand; the federal Ability-to-Repay rule is the law behind them.
The conventional 28/36 rule
The front-end limit is 28% of gross monthly income for PITI; the back-end limit is 36% of income minus recurring monthly debts. The qualifying PITI is the smaller of the two. Income $7,500 a month, debts $700: front-end 0.28 × $7,500 = $2,100; back-end 0.36 × $7,500 = $2,700 − $700 = $2,000. The answer is $2,000, not the $2,700 you get by forgetting to subtract the debts, and not the $2,100 front-end figure.
The FHA 31/43 ratios
FHA manual underwriting uses 31% housing and 43% total. Same borrower: 0.31 × $7,500 = $2,325, and 0.43 × $7,500 = $3,225 − $700 = $2,525. The maximum PITI is the smaller, $2,325. Do not apply the conventional 28/36 answer of $2,000 to an FHA loan, and do not stop at $3,225 before subtracting debts.
Ability to repay
Before consummation a creditor must make a reasonable, good-faith determination of repayment ability using eight factors: current or expected income or assets, employment status, the monthly loan payment, payments on simultaneous loans, mortgage-related obligations such as taxes and insurance, current debt obligations, alimony and child support, DTI or residual income, and credit history. Marital status is not on the list and is a prohibited basis under ECOA. A listing agent's opinion of value is not an ATR factor, and expected appreciation may never be used to justify repayment ability.
Qualified Mortgage limits
A Qualified Mortgage may not have negative amortization, interest-only payments, or a balloon payment outside the small-creditor rural exception. Its term may not exceed 30 years and points and fees may not exceed 3% of the loan amount. A 30-year fully amortized term is permitted, a fixed rate never disqualifies a loan, and an escrow account is neutral and is actually required on higher-priced mortgage loans.