Breaking Down the Debt-to-Income Ratio (DTI)
Your Debt-to-Income Ratio is a percentage that tells lenders how much of your money is already spoken for by other debts. When applying for a mortgage loan your DTI and credit score are the most important numbers a lender considers.
How to calculate your DTI
Divide your total monthly debt payments by your gross monthly income (before taxes). This includes your current mortgage/rent, car loans, student loans, minimum credit card payments, any child support or alimony, and personal loans.
The Two Types of DTI
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Front-End Ratio (Housing Ratio): This includes housing-related costs (the new mortgage payment, property taxes, and insurance) relative to your income. Lenders prefer this to be 28% or less.
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Back-End Ratio (Total Debt Ratio): This includes housing cost plus all other monthly debts (car/student loans, credit cards etc). Lenders want this to be 36-43% or less.
Why Does This Matter?
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Loan Approval: If your DTI is too high (43-50%), lenders worry you cannot carry the payments.
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Interest Rates: A lower DTI can help you qualify for lower interest rates.
