Mortgage 101 – DTI

DTI (debt-to-income ratio) is a major factor in every home mortgage loan. Low DTI ratio’s can be considered a compensating factor while high DTI ratio’s can be seen as a higher risk factor. In today’s postwe will explain some basics regarding DTI, how it is calculated, and what is and is not included in a DTI calculations.

What is DTI?

DTI or debt-to-income ratio is the percentage of a borrower’s gross monthly income that is spent on servicing liabilities.

Living expenses such as cable, internet, telephone, groceries, etc. are not considered liabilities in this sense and are not used as a part of DTI calculations. Items that are included are any existing or proposed items that will appear as a monthly obligation on a borrower’s credit report such as an existing or proposed mortgage, credit card payments, auto loans, etc.

What are front end and back end ratios?

A front end debt to income ratio is the percentage of a borrowers gross monthly income that is spent on a mortgage. This is also commonly referred to as a borrowers housing ratio. A back end debt to income ratio is the percentage of gross monthly income that a borrower pays to cover all monthly credit obligations.

Which is more important, front end or back end DTI?

While some lenders reference front end ratios, and every lender has general guidelines regarding the maximum allowable front end ratio, the more important of the two is the back end DTI. Lenders frequently approve and fund loans with high front end ratios & occasionally allow exceptions over their maximum back end debt ratio guidelines.

How is DTI calculated?

Back End DTIThe basic DTI calculation is very simple.

DTI limits by loan program

Maximum back end debt to income ratios vary depending on the loan program in question. The image below outlines the maximum back end DTI ratios for Conventional, FHA, and VA loans.

Max DTI