Your debt-to-income ratio, or DTI, is a calculation of your minimum monthly debt obligations divided by your gross income. This ratio is used to determine what type of loan you qualify for and how much home you can afford. If your DTI is a little too high, your Loan Consultant may ask that you pay off some of your outstanding debts to better qualify for a loan.
There are two types of debt-to-income ratios, front-end and back-end. Each ratio offers a comparison of your current debt to your gross monthly income but keep reading to find out how they differ!
Front-End DTI
Your front-end ratio, also known as your housing ration, only includes housing-related expenses, such as your monthly mortgage payment, property taxes, homeowner’s insurance and HOA fees. Lenders calculate this by dividing your projected monthly mortgage payment by your monthly gross income. For example, if your assumed mortgage payment is $1,000 a month and your income is $4,000, your front-end ratio is 25 percent.
Back-End DTI
Your back-end ratio is a broader look at your ability to take on a home loan. Car loans, personal loans and credit card payments are added to your projected mortgage to figure out how much new debt you can comfortably afford. Your back-end DTI is what most lenders will be focusing on because it gives a more accurate picture of your monthly spending.
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