What You Need to Know About Debt-to-Income Ratio
When it comes to getting a mortgage, you may think having a high credit score and solid income is all you need to qualify but there are other factors to consider. One of those is your debt-to-income ratio or your DTI.
What is a debt-to-income ratio?
On a very basic level, your DTI is how much debt you have in relation to your income level.
What are the types of debt-to-income ratio?
Oftentimes, lenders will use two types of DTI ratio to determine whether or not you’ll be able to maintain your mortgage payments through the completion of your loan.
The first type of DTI ratio is called the front end ratio. This ratio calculates your current housing costs, either your rent, or your current mortgage payment towards principal and interest, property taxes, and more. To calculate your front end DTI ratio, add up your monthly housing costs and divide it by your current monthly income.
The second type of DTI ratio is called the back end ratio. This number shows how much of your income goes towards monthly housing expenses plus your monthly debt obligations such as student loans and car payments.
What do these numbers mean?
If the ratios you calculated are high, it means your lender feels you may have a difficult time maintaining your mortgage payments. The lower the numbers the more money you have to spare in your budget.
Ideally your front end should be no more than 28 and your back end no more than 36. Although some lenders can bend these numbers if there are other compensating factors. If you’re concerned, the best thing you can do is talk to a trusted lender.
Why are these numbers important?
These numbers are one of the ways lenders decide if you’re a qualified buyer. So when you’re applying for a mortgage, don’t just focus on your high income and creditworthiness, it’s worth looking at your DTI ratio as well.
What other questions do you have about DTI?