Debt to Income Ratios

Debt-to-Income Ratios (DTI) are a simple way to determine your economic profile. They are used by banks and lenders to determine how much money they are willing to loan you. These ratios are essentially a comparison of your mortgage payment and your other monthly bills to your monthly income. Different types of loans and lenders will have different allowances, but here is a basic explanation of how to use these ratios to calculate how much of a mortgage you will qualify for.

The two main types of DTI ratios are front ratio and back ratio, and they are expressed in using the notion of x/y (for example 28/36).

• The first DTI ratio “x,” known as the front ratio, indicates the percentage of income that is used to pay housing costs. For renters, this is the rent, and for homeowners, this is the PITI, which includes mortgage principal (P) and interest (I) payments, property taxes (T), all insurances (I) and homeowner’s association dues (if applicable, as in the case of condos).
• The second DTI ratio “y,” known as the back ratio, indicates the percentage of income that is used to pay housing and all other recurring debt payments such as student loans, other loans, child support payments, alimony and legal judgments.

For example, when qualifying for a mortgage with a debt-to-income ratio of 28/36:

• Yearly Gross Income = $54,000 / Divided by 12 months = $4,500 per month income
  • $4,500 monthly income x .28 = $1,260 allowed for housing expenses
  • $4,500 monthly income x .36 = $1,620 allowed for housing expense plus all other recurring debt

Types of Loans and their corresponding Debt-to-Income Ratios:

• Conforming Loans
  • Conventional financing limits are typically 28/36
  • FHA limits are typically 31/43
• Non-Conforming Loans
  • Back ratio limits of up to 55 were becoming common in recent years, but have started to decrease some since the Recession of 2008-09.
  • Special financing arrangements are also common for professionals in careers typically requiring high student debts, such as physicians and lawyers.