Debt-to-Income (DTI) is one of the mortgage terms that you will hear about when looking to purchase a home or refinance your current mortgage.
DTI is one of the most important mortgage approval factors. It measures a borrower’s gross monthly income compared to the monthly credit payments and other monthly liabilities. It is calculated by dividing those monthly payments by the monthly gross income. (Remember, gross income is before taxes)
There are actually two different Debt-to-Income Ratios that underwriters will review in order to determine if a borrower’s monthly income is sufficient to cover the responsibility of a mortgage according to the particular lender and mortgage program guidelines. One DTI is for the housing and the other is for the total monthly payment outgo.
Two Types of DTI Ratios:
a) Front End or Housing Ratio:
- Divide the estimated new monthly house payment (including tax and insurance) by the gross monthly income
b) Back End or Total Debt Ratio:
- Divide the estimated new monthly house payment plus all consumer debt payments, by the gross monthly income
Here is an example of what this would look like. Say the monthly gross income is $7,000. The new mortgage payment is $2500 and other monthly debt payments are $200. The front ratio would be: $2,500/$7,000 = 36% and the back end (total debt ratio) would be: $2,500 + $200 / $7,000 = 39%
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