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When you’re purchasing a home or an investment property, having a clear picture of your current financial situation is vital. A critical facet of your financial picture is your debt-to-income ratio (DTI). Your DTI matters to you and any lender you want to work with.

Debt to Income Ratio and How to Calculate Yours

The Debt-to-income ratio (DTI) is represented as a percentage. The percentage represents your monthly debt payments divided by your gross monthly income. Lenders use this number to determine whether you’re a risky borrower. You can use your DTI ratio to determine if your finances are where you need them to be.

For most buyers, understanding that your overall DTI ratio is the percentage of your income that goes towards debt income each month is a helpful way to gauge financial health. But some more in-depth breakdown of DTI might be beneficial as well.

There are two types of debt-to-income ratios.

Front-end ratio:  The front-end ratio refers to the total amount you spend towards mortgage costs (including your residence or any investment properties that you have a mortgage on). The expenses that contribute to the total of the front-end ratio include:

  • Mortgage principal
  • Interest on your mortgage
  • HOA fees
  • PMI
  • Property Taxes
  • Hazard insurance (flood, fire, homeowners)

To determine this part of your DTI, you would add up all your mortgage-related expenses and divide it by your total monthly income.

For example, consider the following numbers (broken into monthly payments):

Mortgage and interest payment: $1450

HOA fees: $50

PMI: $125

Property taxes: $160

Hazard insurance: $100

Total: $1885 per month

If your gross income (the amount you earn before taxes) is $6,500 per month, your front-end DTI ratio is 29%

Back-end ratio: The back-end ratio considers all the minimum monthly payments you make towards all recurring debt payments (including your mortgage). The most common types of expenses included in the back-end ratio include:

  • Car loan
  • Credit card
  • Student loan
  • Personal loan
  • Child support and/or Alimony
  • Time-share payments

As an example, consider the following numbers:

Mortgage expenses (from above): $1885

Car loans: $600

Student loan: $350

Credit card payments: $200

Total: $3035 per month.

If your monthly income is $6500, your back-end DTI ratio would be 46.6%.

Both your front- and back-end ratios might be listed like this: 29/47

What is the best debt-to-income ratio?

If you Google this question, you’ll get varying numbers, depending on which site you look at. Still, generally, most lenders agree that you should aim for a total DTI ratio of 36% or less. You may be able to get loans or financing with a DTI as high as 50% from specific lenders, but it’s much more challenging to qualify. Additionally, lenders who offer loans with this type of DTI are more likely to charge excessively high-interest rates and fees.

A DTI ratio above 50% is considered high. You may have a more difficult time getting a loan. The lender may rely on your credit score, savings, assets, or down payment to determine whether to lend you money.

Frequently asked questions about the debt-to-income ratios

What is monthly debt?

Your monthly debt is one of the primary components to determine your DTI ratio. The monthly debt looks at the total monthly payments, not your total debt balance. In addition, your DTI ratio does not consider expenses like groceries, utilities, internet, or other miscellaneous costs.  

What is gross monthly income?

Your gross monthly income includes all sources of income before taxes. Lenders look at pre-tax money when calculating your DTI. This means that you could qualify for more debt than your take-home pay covers.

Are there mortgage debt-to-income limits?

Yes. Most lenders won’t approve additional debt if your debt-to-income ratio exceeds 43%. This upper limit can shift depending on the market and lender attitudes. Ideally, you should have a DTI ratio below 36% to get the best interest rates.

How do I calculate my debt-to-income ratio?

To determine your debt-to-income ratio, add up all your monthly debt payments. This should include credit cards, store cards, personal loans, car loans, student loans, and mortgage loans. Divide that total by your monthly gross income. You can find your gross monthly income on your paystubs.

How to lower your debt-to-income ratio.

There are two ways to lower your debt-to-income ratio. The most straightforward way is to pay off the balance on your debt to eliminate some of your debt payments or ask your lender to reduce your monthly payments. You could also increase your income by taking on more hours at work, taking on a side-hustle, or asking for a raise.

If you want to lower your debt-to-income ratio, avoid taking on additional debt. Just because you could qualify for a new loan or another line of credit doesn’t mean you should.

Have more questions? We’re happy to help.  

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