What is a debt to income ratio?

A debt to income ratio, commonly referred to as DTI, is the ratio of the amount of monthly expenses you have relative to your gross (before tax) income. 

The automated underwriter will look at two ratios when analyzing your DTI: your front end DTI ratio and your back end DTI ratio.

Front End DTI

The front end DTI is the ratio of your new housing payment including taxes and insurance relative to the amount of income you earn.  The front end DTI ratio excludes all other debts and simply analyzes your income relative to the payments on the new mortgage plus tax and insurance. 

So, if your mortgage payments including tax and insurance are $1,000 and you earn $4,000 per month in gross income, your front end DTI would be 25% ($1,000 / $4,000 = 25%). 

Generally, the automated underwriter likes to see front end DTI ratios below 40%, although it will approve higher front end DTI ratios with compensating factors like high credit scores, money in the bank, low loan to value ratio, etc. 

Back End DTI

The back end DTI is the ratio of all of your expenses appearing on your credit report plus your new mortgage payment including taxes and insurance divided by your gross monthly income.  The back end DTI ratio does not include things like utilities, health insurance or groceries.  It is calculated using only the liabilities appearing on your credit report plus any child support or garnishments that may appear on your paystubs. 

So, to continue our example from above, if your mortgage payments with tax and insurance are $1,000 per month, you have a $250 car payment, $250 in credit card payments and a gross income of $4,000, your back end DTI is 37.5% ($1,500 / $4,000 = 37.5%). 

Generally the automated underwriter likes to see back end DTI ratios under 45%.  However, it will approve loans with a 55% back end DTI or higher if there are compensating factors. 

It is important to understand what a debt to income ratio is, however, you do not have to calculate it yourself.  Your Loan Originator and your Processor will do this for you. 

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