Debt-to-Income Ratio Explained

By James Lutz, Mortgage Loan Officer

In the consumer mortgage industry, debt-to-income ratio (often abbreviated DTI) is the percentage of a consumer’s monthly gross income that goes toward paying debts. However, DTIs can cover more than just debts – they can include principal, taxes, fees and insurance premiums as well. There are two main kinds of DTI discussed below.

  1. The first DTI, known as the front-end ratio, indicates the percentage of income that goes toward housing costs, which for renters is the rent amount and for homeowners is PITI (principal, interest, taxes, and insurance).
  2. The second DTI, known as the back-end ratio, indicates the percentage of income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments.

Example – If the lender requires a debt-to-income ratio of 28/36, then to qualify a borrower for a mortgage, the lender would go through the following process to determine what expense levels they would accept:

  • Using Yearly Figures:
    • Gross Income of $45,000
    • $45,000 x .28 = $12,600 allowed for housing expense.
    • $45,000 x .36 = $16,200 allowed for housing expense plus recurring debt.
  • Using Monthly Figures:
    • Gross Income of $3,750 ($45,000/12)
    • $3,750 x .28 = $1,050 allowed for housing expense.
    • $3,750 x .36 = $1,350 allowed for housing expense plus recurring debt.

It is always best to consult with your mortgage lender in regards to what type of debt can be counted against your future approval status. To contact our team, call 877.312.9033.