DTI – Debt-to-Income Ratio

DTI

is the abbreviated for

debt to income ratio

and stands for a percentage of a consumer’s gross income per month that goes to paying off debts.

debt to income ratio

also includes taxes, fees and charges, insurance premiums. In most cases,

debt to income ratio

is divided into two main kinds, they are shown as a pair using the notation x/y (for instance, 30/45).

The first

debt to income ratio

is also known as the front ratio, and shows the percentage of the consumer’s income that you spend to pay your housing expenses. If you rent a home, then it’s the rent amount, if you own a home, then it’s PITI (including mortgage principal and interest, mortgage insurance premium, property taxes, homeowners association fees, hazard insurance premium).

The second debt-to-income (back ratio) indicates the share of the income that you pay towards your current debts (including the ones that are in the front ratio), and some others, like car loan, credit card debt, student loan payments, child support, alimony, legal judgments, etc.

Let’s see the example how

DEBT TO INCOME RATIO

is calculated. Say, you want to get a mortgage for which the lender requires you have a

DEBT TO INCOME RATIO

of 28/36.

If your gross income is $45,000 per year / divided by 12 months = $3.750 gross income per month. $3.750 x 28 (front ratio) = $1.050 (this is how much you are allowed to spend for the housing expenses per month). $3.750 x 36 (back ratio) = $1.350 (this is how much you are allowed to spend for paying out your current debts and housing expenses). Now, let’s see the

debt to income ratio

limits for qualifying borrowers. Generally, for the conforming loans, the following limits are acceptable (in the U.S.): - 28/36 for conventional financing - 31/43 for FHA - Only one DTA of 41 is required for VA (which equals to 41/41). For the nonconforming loans back ratios of 55 are quite normal these days. The spate of defaults by sub-prime borrowers during the recent years may as well results in downward movement of that ratio, however it is still to be seen.