Debt-to-income Ratio

Debt-to-income Ratio

A debt-to-income (DTI) ratio is a tool we use to make sure mortgage borrowers can afford their mortgage payments, along with their other obligations. It is a good idea to calculate your DTI ratio before you apply for a mortgage, as we have a maximum allowed ratio. Your DTI ratio includes many debts you may not consider when you are deciding how much mortgage you can afford, and it will consider only your gross income.

There are two types of debt-to-income ratios to understand: the front-end ratio and the back-end ratio. Here is what you should know.

Debt to Income

What is Included in Your DTI Ratio?

Your DTI ratio will consider only your gross income, which means pre-tax salary, along with other income, such as a pension or rental income. You can determine your gross monthly income by dividing your annual income by 12.

The ratio will include fixed, monthly debt payments that would appear on your credit report, not expenses like utilities, clothing or food.

Debt to Income Ratio

Your debt-to-income ratio includes:

  • Housing costs
  • Minimum monthly credit card payments
  • Personal loan payments
  • Alimony or child support
  • Car loan payments
  • Home equity loan payments
  • Student loan payments
Front End Ratios

What are Front-End and Back-End Ratios?

We will first look at your front-end ratio, which considers your monthly gross income compared to your proposed PITI payment, or your principal, interest, property taxes and homeowners insurance/mortgage insurance. This ratio will be used to help determine how much you can comfortably pay.

Next, we will look at your back-end ratio, which includes the monthly debt obligations listed above.

Back End Ratio

What Lenders Want to See with Your Debt-to-Income Ratio

We want your front-end ratio to be no more than 28 percent, while your back-end ratio (which includes credit card payments and other debts) should not exceed 36 percent. We may be willing to exceed these limits slightly, if you have excellent credit. If you get a government-backed mortgage, like a VA or FHA loan, guidelines are usually looser. You can have a front-end ratio of up to 29 percent and a back-end ratio of 41 percent with an FHA loan.

For your loan to be considered a Qualified Mortgage under the new mortgage rules of 2014, your DTI ratio cannot be higher than 43 percent.

Qualified Mortgage

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