Debt-to-Income Ratio Explained
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DTI, or Debt-to-Income Ratio, represents the ratio between a person’s monthly debt and his or her monthly income. There are two types of DTI, Front-end and Back-end DTI, and these ratios are calculated based on your proposed monthly debt, not your current monthly debt.
Front-End DTI
Front-End DTI considers only your monthly housing-related expenses. This include the minimum payments you have every month, like monthly Property Taxes, monthly Home Owner Insurance Payment, monthly Home Owner’s Association Dues .. etc. To figure Front-End DTI, add up all of the items above and divide by your monthly gross income. Each lender may have slightly different Front-End DTI limits, but if we assume that a lender will require the Front End DTI to be 40% or so; then no more than 40% of your monthly income, (before-tax), should be going toward housing-related debts.
Back-End DTI
Back-End DTI takes into account all of your monthly debt payments, however, other than property taxes, home owner insurance, and home owner’s association dues, only debts appearing on your credit report count. You may need a copy of your credit report to figure this one out, especially since that’s what the lender will use when qualifying you for a loan.
Back-End DTI, add up the items on this list and divide by your monthly gross income.
Each lender has slightly different requirements for Back-End DTI limits; but if we assume the max allowed by some lender is 50%, then your total payments for all loans on your credit report should not exceed 50% of your income before tax.
This all seems pretty simple, but most of the time it’s not quite as easy to figure our income and DTI ratio. Rental income, increase of personal income due to job changes and other factors will affect your loan application and how much you can qualify for. My goal is to make the loan happen for those who really qualify. If you have trouble qualifying for a loan, instead of full-documentation, you may want to explore SI Loans and SAVA (Stated Income, and Stated Income Verified Assets) loans. If you are a First Time homebuyer, then you should know of many other programs that allow for higher DTI and lower down payments, like first time homebuyer and fha loans. The important thing is that you work with a knowledgeable mortgage broker know the requirements at the lenders he does business with, otherwise, you may find yourself out of !
As always, if you have any questions or you need more information on any of the loan programs shown in this site, please feel free to call me in my office at 1-347-559-5626 or you can email me at question@the123Mortgage.com.