Your debt-to-income ratio (DTI) is one of the most important considerations for a mortgage lender because it indicates your financial capacity to repay a mortgage. A higher DTI tends to mean more risk for the lender, a lower DTI means less risk.
What is a Debt-to-Income Ratio?
Your DTI is basically the proportion of your monthly gross income that pays debts such as car loans, student loans, credit cards, etc., as well as housing expenses such as rent or mortgage payments (including taxes, insurance, mortgage insurance, HOAs, etc.).
If you have a high DTI, it indicates that you have tight finances and could have a tougher time keeping up with payments in event of unexpected expenses or a loss of income. If you have a very low DTI, lenders consider it much safer to lend to you because you have the extra cash flow to easily keep up with the payments even if you have a financial emergency.
The maximum DTI allowed in today's mortgage marketplace is 50% for FHA-insured loans and 45% for Fannie Mae conventional loans. In other words, for an FHA loan, no more than 50% of your qualifying monthly income can go to debt and housing expenses, 45% for conventional financing. Fannie Mae and FHA guidelines do occasionally allow for higher DTIs, but only in limited circumstances and with other compensating factors, such as high credit scores, assets, etc.
While you're working with your mortgage lender, you may hear the terms "front end" and "back end" DTI come up. Your "front end" DTI is the percentage of your income that pays just your house payment, including property taxes, homeowners insurance, mortgage insurance, and any HOA fees. "Back end" DTI includes all housing and debt expenses.
Front end DTI isn't as big a concern as in past years, but it still does come up every now and then. Most lenders these days are concerned primarily with your back end DTI.
How to Calculate DTI
Calculating your DTI is pretty easy. Simply divide your total monthly debt payments and rent or housing payments (including taxes, insurance, mortgage insurance, and HOA fees) by your gross monthly income, as follows:
1) Obtain a copy of your credit report or gather up your most recent statements for all your debt obligations. Note that only debt obligations are included in your DTI, not utility bills, phone, cable, etc.
2) Add up all your payments except for rent or mortgage for now. Make sure to include credit cards (use just the minimum payment), student loans, car loans, and any other debt obligations that you have.
3) Now add to your running total your monthly rent or mortgage payment, including taxes, insurance, any mortgage insurance or PMI, and HOA fees.
4) Divide the total by your gross monthly income, then multiply by 100 to get your DTI percentage.
If you're looking to purchase a house or refinance your existing mortgage and want to determine your DTI for the new mortgage, substitute your existing rent or mortgage payment (including all taxes, insurance, mortgage insurance, and HOA fees) for the new estimated mortgage payment.
What is a Debt-to-Income Ratio?
Your DTI is basically the proportion of your monthly gross income that pays debts such as car loans, student loans, credit cards, etc., as well as housing expenses such as rent or mortgage payments (including taxes, insurance, mortgage insurance, HOAs, etc.).
If you have a high DTI, it indicates that you have tight finances and could have a tougher time keeping up with payments in event of unexpected expenses or a loss of income. If you have a very low DTI, lenders consider it much safer to lend to you because you have the extra cash flow to easily keep up with the payments even if you have a financial emergency.
The maximum DTI allowed in today's mortgage marketplace is 50% for FHA-insured loans and 45% for Fannie Mae conventional loans. In other words, for an FHA loan, no more than 50% of your qualifying monthly income can go to debt and housing expenses, 45% for conventional financing. Fannie Mae and FHA guidelines do occasionally allow for higher DTIs, but only in limited circumstances and with other compensating factors, such as high credit scores, assets, etc.
While you're working with your mortgage lender, you may hear the terms "front end" and "back end" DTI come up. Your "front end" DTI is the percentage of your income that pays just your house payment, including property taxes, homeowners insurance, mortgage insurance, and any HOA fees. "Back end" DTI includes all housing and debt expenses.
Front end DTI isn't as big a concern as in past years, but it still does come up every now and then. Most lenders these days are concerned primarily with your back end DTI.
How to Calculate DTI
Calculating your DTI is pretty easy. Simply divide your total monthly debt payments and rent or housing payments (including taxes, insurance, mortgage insurance, and HOA fees) by your gross monthly income, as follows:
1) Obtain a copy of your credit report or gather up your most recent statements for all your debt obligations. Note that only debt obligations are included in your DTI, not utility bills, phone, cable, etc.
2) Add up all your payments except for rent or mortgage for now. Make sure to include credit cards (use just the minimum payment), student loans, car loans, and any other debt obligations that you have.
3) Now add to your running total your monthly rent or mortgage payment, including taxes, insurance, any mortgage insurance or PMI, and HOA fees.
4) Divide the total by your gross monthly income, then multiply by 100 to get your DTI percentage.
If you're looking to purchase a house or refinance your existing mortgage and want to determine your DTI for the new mortgage, substitute your existing rent or mortgage payment (including all taxes, insurance, mortgage insurance, and HOA fees) for the new estimated mortgage payment.
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Also check out: What is LTV and why does it matter for a mortgage shopper? And do credit inquiries really damage credit scores?
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