Understanding Debt-to-Income Ratio, Calculating DTI

You must not have more debt than you can manage comfortably with your present income. To get an idea of your ability to qualify for a mortgage, the underwriter uses mortgage qualifying ratio, which is based on your debt-to-income ratio. A debt is defined as the money you owe to a person, company, organization or entity.

What are the other things you need to qualify for a mortgage?

What is a debt-to-income ratio?

Abbreviated as DTI, a debt-to-income ratio represents in percentage the portion of your gross monthly income that goes toward paying debts. To calculate DTI, you only need to divide your debt payments by the gross monthly income. Depending on the types of debts, there can be two ratios – Front-end Ratio and Back-end Ratio. These two are also referred to as Housing Expense Ratio and Total Expense Ratio, respectively.

What is a housing expense ratio?

The percentage of your gross monthly income that goes toward paying housing expenses is referred to as the housing expense or front-end ratio. If you are a renter, your total rental payment including renters insurance will be taken into account for the calculation. For a homeowner, the debt amount includes all components of the monthly mortgage payment (PITI).

What are the components of a mortgage payment?

What is a total expense ratio?

Your housing expenses as well as other debts are considered for the calculation of the total expense ratio, also known as back-end ratio. The other debts may include credit card bills, auto loans, student loans, home equity loans, condominium fees, child support payments and alimony payments.

What is a home equity loan?

How to calculate your debt-to-income ratio?

To calculate your debt-to-income ratio, you only need to divide your monthly debt payments by your gross monthly income. To express it as a percentage of your income, you need to multiply the quotient by 100. To illustrate this with an example, we assume that the gross monthly income is $5000 and the total monthly expenses, including housing expenses, are $2000. The housing expenses are $1200.

The housing expense ratio will be

1200/5000 = 0.24

To express it as a percentage

0.24×100 = 24%

The total expense ratio will be

2000/5000 = 0.4

To express it as a percentage

0.4×100 = 40%

What are the current DTI limits for home mortgages?

The debt-to-income ratio is usually expressed as the following

Housing expense ratio/total expense ratio

For conventional loans based on Fannie Mae standards, the DTI is typically 28/43, where 28% is the maximum allowable housing expense ratio and 43% is the maximum allowable total expense ratio. The DTI limits for FHA loans are 31/43.

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