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Debt To Income Ratio

I am applying for a mortgage and want to know what a debt to income ratio is, and what is my DTI number?

I am applying for a mortgage and want to know what a debt to income ratio is, DTI number, and what I need to know to get my mortgage and not have a bad debt to income.

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Highlights

  • DTI is your debt to income ratio.
  • A debt to income ratio measures if you can repay your mortgage.
  • Try to keep your debt payments below 29% of your income.

Thanks for your question on debt to income, which indeed is often referred to as a DTI ratio. This is a critical measure that mortgage lenders use to evaluate your ability to make your mortgage payments. I will try to get you some information below on what a debt to income score is and some DTI tips to help you out.

Debt-to-Income Ratio and DTI Definition

Debt-to-Income ratio (DTI) is a comparison of your monthly gross income and your monthly repayment obligations to creditors. For example, if you gross $2000 each month and your debt payments total $500, your DTI would be 25%. When you apply for new credit, potential lenders look at your DTI to determine if you can realistically afford your current debt payments, and if so, how much additional debt you can afford to repay. DTI is one of the most important factors considered by potential lenders, as it is a good indication of your ability to repay the new loan.

There are two types of DTI that most lenders take into consideration. The first is typically known as the front-end ratio, which accounts for a person's housing costs. The housing costs include rent (for non-homeowners). For homeowners it would include the mortgage principal and interest payment, mortgage insurance (if applicable), property taxes, insurance, and (if applicable) homeowner's association (HOA) fees. The second is usually considered the back-end ratio. This consists of all other debt payments such as unsecured debt, auto loans, student loans, legal judgments, child support, alimony, and all items covered in the front-end ratio.

Debt-to-Income Ratio Summary

Every lender determines its own guidelines regarding allowable DTI ratios for new loans. Generally speaking, a combined DTI over 55% is considered very risky, and could make obtaining a new loan difficult. Also, you will usually want to keep your front-end debt to income ratio below about 29%, as a rule of thumb, so don't borrow to buy too expensive of a house if your income cannot support it. Lenders will help you calculate and analyze your debt-to-income ratio to determine the size mortgage you can afford. In fact, your DTI and your loan-to-value (LTV) are frequently the most important numbers that lenders look at when quoting you a mortgage amount and interest rate. When considering to purchase a home or refinance a home you should calculate your DTI to see where you stand. So as you can see, your debt-to-income ratio can tell you a lot about your debt and your chances of qualifying for a mortgage loan.

Debt-to-Income Tips

If you want to identify your overall financial situation and keep your debt in check, you need to establish your debt-to-income ratio. The best thing to do is to keep your debt under control and not to take on too much debt. If you take on too much debt it could hinder your ability to qualify for a mortgage and send your finances plummeting, it could also cause you unnecessary stress if you stretch too much and borrow more than you can comfortably afford each month.

After you calculate your debt-to-income ratio, it's time to discover what your ratio is telling you. If you have a DTI ratio of 10% or less, it means you have a great debt-to-income ratio, meaning your income is significantly more than what you owe. A DTI of about 29% is considered by financial experts as the highest most consumers can handle comfortably. If you have a debt-to-income ratio of 55% or higher, it means you are taking on too much debt in relation to your income. A DTI greater than 55% is considered very risky since it will be difficult to continue to cover your monthly debt obligations with your current income.

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To get a free Mortgage Refinance Quote apply with the Bills.com lenders and be sure to check out all of the informative tools and resources available for all of your mortgage needs at Bills.com.

I hope this information helps you Find. Learn & Save.

Best,

Bill

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8 Comments

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  • BA
    Oct, 2010
    Bill
    Debt-to-income ratio does not look at all of one's monthly liabilities. DTI is calculated looking at monthly housing costs (PITI- principal, interest, taxes, and insurance) and debts that appear on a credit report, such as mandatory monthly minimum credit card payments, student loan payments, and car payments. Substantial monthly bills like food costs, car insurance, and utilities are not included in the DTI ratio.
    0 Votes

  • CA
    Oct, 2010
    Cash
    Debt to Income ratio is the percentage figure calculated by division of all of your monthly liabilities with your gross monthly income.
    0 Votes

  • BA
    Aug, 2010
    Bill
    That is a good summary of a debt to income ratio. Since most mortgage lenders will look closely at this figure, it is important for consumers to know their DTI just like they know and optimize their credit score. Unfortunately, debt to income gets a lot less attention but it is vitally important for financial health. bills.com
    0 Votes

  • PI
    Aug, 2010
    Payday
    A debt-to-income ratio is the percentage of a consumer's monthly gross income that goes toward paying debts. It can also include certain taxes, fees, and insurance premiums as well. To know your debt to income ratio, add up your total net monthly income, then add up your monthly debt obligations. Divide your total monthly debt obligations by your total monthly income. This is your total debt-to-income ratio.
    0 Votes

  • BA
    Jul, 2010
    Bill
    A DTI of about 29% is considered by financial experts as the highest most consumers can handle comfortably on their mortgage and housing payments.
    0 Votes

    • RB
      Jan, 2011
      RAYMOND
      Wilton, NY
      Nonsense to the 29% DTI. Now it is anywhere from 30% - 35% which is still financially healthy.
      0 Votes

    • BA
      Jan, 2011
      Bill
      For FHA-backed loans, the FHA allows applicants to use 29% of their income towards housing costs and 41% towards housing expenses and other long-term debt. The FHA allows an applicant to exceed 29% if the applicant has:
      1. A large down payment
      2. A demonstrated ability to pay more toward housing expenses
      3. Substantial cash reserves
      4. Net worth enough to repay the mortgage regardless of income
      5. Evidence of acceptable credit history or limited credit use
      6. Less-than-maximum mortgage terms
      7. Funds provided by an organization
      8. A decrease in monthly housing expenses

      Non-FHA loans may have higher DTI limits.

      0 Votes

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