When you apply for a mortgage, your debt-to-income ratios (abbreviated DTI) are an important factor used by lenders to determine how much your can borrow. These limits might be frustrating but the debt-to-income ratios are used to prevent you from taking on more debt than you can handle, a problem lender want to avoid.
The DTI looks at the percentage of your monthly gross (before taxes) income that will go towards paying all debt. It goes a bit further too, including the mortgage principal, property taxes and home insurance (abbreviated as PITI).
There are two debt-to-income ratios that are considered:
- The front-end ratio focuses on your housing costs, which can be rent or for homeowners, it’s mortgage principal and interest, property taxes, home insurance and where applicable, property mortgage insurance (PMI) and homeowner association dues.
- The second ratio is known as the back-end ratio. It looks at the percentage of your gross income that is needed to cover all of your recurring, monthly debt payments. In addition to your housing costs (PITI), it includes car loan payments, student loan payments, child support and alimony payments, credit card payments and any other legal judgments for which you’re legally obligated to make monthly payments.
These ratios are usually written as front-end/back-end. For example, conforming loans typically have 28/38 ratios, although these vary by lender. Lenders willing to assume more risk, may allow higher ratios if there are factors to support it like a large down payment. That’s why you may need to shop around for a lender that matches your financial situation, although most mortgage brokers will do just that.
Debt-to-income ratios are also different for government lending programs other than Fannie Mae and Freddie Mac. If you’re applying for an FHA loan, VA loan or a USDA loan, you can get their ratios on a mortgage information website like TheTruthAboutMortgage.com but I recommend going directly to the applicable government website for the latest information.