Debt Ratios and How to Calculate Your DTI?

Debt Ratios and How to Calculate Your DTIWhat are Debt Ratios or DTI?

Many first-time home buyers who are engaging in the home buying process will hear this new term related to mortgage, called the Debt ratios or DTI ratio. The DTI is a part of the approval process of a mortgage. If you’re wondering how to calculate your debt to income ratio, it’s the calculation of the Gross Monthly Income of the borrower in comparison with their credit payments and various monthly liabilities.

They are designed to guide the lenders and particular home loan option regarding the level of debt that is acceptably allowed.

The underwriters review two different Debt-to-Income ratios to determine whether the borrower has sufficient monthly income to cover the mortgage responsibility in accordance with the guidelines of the specific mortgage program or the lender. Usually, loan programs accept a Housing DTI of 31% and a Total DTI of 43%.

Two Types of Debt Ratios and Calculating your DTI:

DTI ratios are of two types, namely:

  • Housing Ratio or Front End: This should constitute between 28% and 31% of the gross income of the individual. The estimated monthly payment of mortgage is divided by the individual’s gross monthly income.
  • Total Debt Ratio or Back End: This should be no more than 43% of the individual’s gross monthly income. The entire consumer debt in addition to the estimated payment of the house is divided by the individual’s gross income for the month.

All Debt ratios are calculated on the gross income before tax deductions. Lenders also often use the tax returns or the W2’s in order to verify employment and income. All the same, for self-employed borrowers, the DTI ratio is based on the adjusted gross income. Of course, there is ample room for interpretation in these calculation guidelines. Thus, it is advisable to consult a trusted mortgage advisor to review one’s personal employment or income scenario in order to ensure that everything takes place in accordance with the stipulated guidelines.

About Ric Dizon

Ric Dizon is a mortgage consultant (NMLS 230093) with imortgage, a premier mortgage banker in Long Beach, California. He's in love with four things in life...being a dad, his Ku'uipo Pamela, Hawaii and finding you the right home loan. Connect with Ric on Facebook, Google+, Pinterest, Twitter and check out his Instagram photos.


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