Understanding Debt To Income Ratio

Understanding Debt To Income Ratio

When applying for a new mortgage, you will most likely hear the term “debt-to-income” ratio or “DTI” at least once. Though many people do not understand the meaning behind this phrase, it is one of the most significant factors considered when determining whether you will qualify for a loan.

What is it?

Debt-to-income ratio is the percentage obtained when your total monthly debt is divided by your gross income. There are two different types of debt-to-income ratios used in mortgage calculations: front-end ratio and the back-end ratio. The front-end ratio considers only your mortgage, property taxes and homeowner’s insurance payments in its monthly debt calculation, while the back-end ratio also includes all other revolving debts such as credit card payments, automobile loan payments, child support and alimony.

How will it affect me?

Lenders place limits on acceptable ratios, and they won’t approve your mortgage if you don’t fall within these limits. For a conventional loan, Fannie Mae lists the limits as 28% for the front-end ratio and 36% for the back-end ratio. The Department of Housing and Urban Development reports that FHA limits are slightly more lax with a limit of 31% for the front-end ratio and 43% for the back-end ratio. Some lenders may be willing to make exceptions in special cases, but these are the general guidelines.

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