Debt-to-Income Ratios - What Are They?

When your mortgage lender talks about your debt-to-income ratio (DTI), just what does that mean?  Your DTI impacts your ability to qualify for a mortgage.  So knowing your DTI even before you apply for a mortgage can help you best move forward into home ownership.

What is debt-to-income ratio?

Your DTI compares the amount of money you spend each month paying off your debts to your monthly gross income.  It gives the lenders an idea of how much money you have to put toward your mortgage and what kind of debt you can handle.  Lenders want to be sure you can make your monthly house payment, whatever it might be.  Lenders typically look for DTIs lower than 30 percent, though that number and possible exceptions differ from case to case.  Higher percentages signal to lenders that your finances are stretched too thin and that you’ll potentially struggle to make your monthly mortgage payments.

Back-end and front-end DTI

There are two types of DTI: back and front end.

Front-end DTI is entirely focused on housing related expenses.  It’s calculated by adding your future monthly mortgage payment with mortgage insurance, property taxes, and HOA fees if applicable.  That number is then divided by your gross monthly income.

Back-end DTI is the percentage of your monthly gross income that goes toward all additional debts. These include things such as student loans, credit card debt, car loans, back taxes, alimony, child support and personal loans.

How to calculate your DTI

To calculate your DTI, add up all your recurring monthly debt payments.  This includes mortgage (if you currently have one), HOA fees, car loan, student loans, child support, alimony, credit card payments and any other personal loans.  Once you’ve totaled all these expenses, divide that number by your gross monthly income, which is your pre-taxed income. Multiply that number by 100 to get your DTI percentage.

Bottom line

You can improve your DTI by paying off your existing debts or decreasing your monthly housing expenses.  Reducing your DTI can help you qualify for a better mortgage rate.