What is the debt to income ratio (DTI)? 

You will hear the term debt to income ratio, or DTI as we will refer to it, several times when working with your lender. The DTI is an important qualifying criteria lenders use to determine how much income you have available after paying your bills. DTI, when referred to as a single number, is the “back-end” DTI ratio. The less commonly referred to debt to income ratio is the “front-end” ratio which we will discuss later.

Back-end, or overall DTI, can be calculated by adding up payments to creditors, including your mortgage, and dividing by your gross monthly income. For example, somebody making $5000/month and has a mortgage payment of $1800.00/month plus another $389.00/month in other payments, would have a back-end DTI of 43.78% 

Back-end DTI in our example:  

($1800.00 + $389.00) ÷ $5000.00/month income = 43.78% back-end DTI 

Another type of DTI is the “front-end” ratio. This DTI ratio is commonly referred to as the housing ratio. You can compute your front-end DTI by taking your monthly housing payment and dividing that by your gross monthly income. Revisiting our previous example, the housing ratio would be 36% DTI.

Front-end DTI in our example:

$1800 mortgage payment ÷ $5000/month income = 36% front-end DTI

The common standard for DTI ratios on conventional mortgages is 28/36. In simple terms, lenders will allow 28% debt to income for your housing ratio and 36% debt to income for you total expense ratio. FHA loans will allow 31/43 and VA loans only use the back-end ratio of 41% for qualification.  Even though these DTI standards are in place, in many circumstances you can exceed these numbers and still obtain a loan approval.

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