What is Debt to Income Ratio
What Is Debt-To-Income Ratio?
Your debt-to-income ratio, or DTI, is a percentage that tells lenders how much money you spend on paying off debts versus how much money you have coming into your household. You can calculate your DTI by adding up your monthly minimum debt payments and dividing it by your monthly pre-tax income.
When you apply for a mortgage, you’ll need to meet maximum DTI requirements so your lender knows you’re not taking on more debt than you can handle. Lenders prefer borrowers with a lower DTI because that indicates less risk that you’ll default on your loan.
Your lender may look at two different types of DTI during the mortgage process: front-end and back-end.
Front-end DTI only includes housing-related expenses. This is calculated using your future monthly mortgage payment, including property taxes and homeowners insurance as well as any applicable homeowners association dues.
Back-end DTI includes all your minimum required monthly debts. In addition to housing-related expenses, back-end DTIs include any required minimum monthly payments your lender finds on your credit report. This includes debts like credit cards, student loans, auto loans and personal loans.
Your back-end DTI is the number that most lenders focus on, because it gives them a more complete picture of your monthly spending.