CS Real Estate Texas
Carl Stidston EXP Realty DFW & Surrounding Areas, TX
Mobile: 817-598-6706

Debt to Income Ration (DTI)


What does that mean?

The simple Answer: Your debt-to-income ratio (DTI) is your monthly debt payments divided by your monthly gross income, viewed as a percentage.  This is one of the primary statistics that lenders use to measure your ability to repay a loan.  Higher ratios increase the likelihood that a borrower will default on a home loan.

   

Gross income is the total income earned by a consumer. It is not to be confused with net income which is the amount received on a paycheck after paying government and states taxes.

 

DTI should not only be used by lenders in determining a new mortgage loan amount but by potential homeowners to decide on a budget of how much mortgage they can realistically afford.  As explained below, the specific percentage that financial institutions will require will be specific to the type of mortgage loan you wish to apply for. 

 

(For more information determining the right loan for you, I recommend speaking with a local mortgage professional.)

To further analyze these criteria, there are two kinds of DTI:

  • front-end ratios - are the monies paid toward monthly housing costs divided by gross income. For a homeowner, the front-end ratio can be calculated by adding up all housing expenses such as rent or complete mortgage payments (PITI) dividing it by the homeowner’s gross income.

    Example:  a customer with a monthly gross income of $6,000, who owes $1,680 in monthly mortgage payments, would have a front-end DTI ratio of 28 percent

 

  • back-end ratios - are the monies paid toward total monthly debt, including housing costs, credit card payments, car loans, student loans, and any other debts.

    Example: a customer with a monthly gross income of $6,000, who has $2400 in monthly liabilities (a $1680 monthly mortgage payment and $720 in credit card and monthly auto loan payments), would have a back-end DTI ratio of 40 percent.

 

How DTI Ratios are Used

 

As a general rule of thumb, your front-end and back-end debt ratios goal should be 28 percent and 36 percent or lower.  Most lenders want back-end debt to account for no more than 36 percent of a consumer’s gross income.  Please note that these ratio requirements are subject to change and higher ratios may be accepted with justification from the lender.

    

 

As of the start of 2017. 

  • FHA loans - qualifying ratios are 31 percent for front-end ratios and 43 percent for back-end ratios. For borrowers under the FHA’s Energy Efficient Homes, the ratios are stretched to 33 percent and 45 percent, respectively.

 

  • VA loans - the maximum back-end ratio to qualify for a new mortgage loan is 41 percent.

    If your DTI ratio is too high, it may be best to lower that ratio before taking on a new mortgage loan. Contact your local financing professional before paying off loans or starting with credit repair as they can help you design a road map to getting in that new home.   As loan approval is a combination of DIT and Credit, sometimes paying off student debts, personal loans, and credit cards will help to improve a potential borrower’s chances of gaining lender approval.

 

  • Other loan types may also be available to you and better meet your current financial needs.