Debt-to-income Ratios
The debt-to-income ratio is, simply, the way that mortgage lenders decide how much money you can comfortably afford to borrow. It is the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts (not your monthly living expenses). Two calculations are involved, a front ratio and a back ratio, written in ratio form, i.e., 33/38.
The first number indicates the percentage of your monthly gross income used to pay housing costs, such as principal, interest, taxes, insurance, mortgage insurance and homeowners’ association dues. The second number indicates your monthly consumer debt, such as car payments, credit card debt, installment loans, etc. Other living expenses are not considered debt.
Front-end ratio is the percentage of income that goes toward your total monthly mortgage costs, such as:
- Mortgage principal and interest
- Hazard insurance premium
- Property taxes
- Mortgage insurance premium (if applicable)
- Homeowner's association (HOA) dues (if applicable)
Back-end ratio is the percentage of income that goes toward paying all recurring, minimum monthly debt payments, in addition to the monthly mortgage costs covered by the front-end ratio. Recurring monthly debt payments may include:
- Credit card payments
- Car loan payments
- Student loan payments
- Personal loan payments
- Child support payments
- Alimony payments
- Vacation/rental property costs
What is a good debt-to-income ratio?
| 36% or less | DTI ratio is good | A debt-to-income ratio of 36/43 is favorable to lenders, because it shows you're not overstretched. After paying your monthly bills, you most likely have money left over for saving or spending. |
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| 37% - 50% | DTI ratio is OK | The maximum allowed DTI can vary depending on the type of home loan you're applying for, and the requirements set by your lender. In most cases, the highest DTI that a homebuyer can have is 50%. |
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| 51% or higher | DTI ratio is high | Just because you have a high DTI ratio doesn't mean you can't still qualify for a home loan. Lenders will look at your credit score, savings, assets, down payment and property value in addition to your DTI when considering your loan eligibility. Paying down debt or increasing your income can help improve your DTI ratio. |
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