Definitons: DTI also known as debt to income

DTI also known as debt to income is becoming one of the most important factors when obtaining a loan. The debt to income is a ratio of your debt versus the gross monthly income. This ratio is largely evaluated when determining the risk of the loan. Here is how we calculate your debt to income.

Front end debt to income is the total housing expense divided by your gross monthly income. Total housing expense includes your principle and interest, mortgage insurance, taxes and homeowners insurance monthly. This is commonly referred to as PITI, principle, interest, taxes and insurance. The mortgage insurance is not always charged.

Ex. (excludes mortgage insurance) 100K loan amount @ 6% interest = $599.55 principle and interest + $104.17 taxes and $30 for homeowners insurance = $733.72. If you make $3,000 per month gross then your front end DTI will be $733.72/$3000 = 24% housing debt. This means that your housing debt monthly is 24% of your gross monthly.

The back end ratio which is very closely looked at will take into account the minimum monthly debts that you are expected to pay that report to your credit. Examples include credit card minimums, car payments, student loans, or any other note loan. So the back end ratio will be the housing expense + all the minimum amounts due divided by your gross monthly.

Ex. car payment = $300, credit cards = $300 and student loan = $200 then you have $800 debt load per month. If the house payment is $733.72 + $800 = $1533.72 divided by the gross monthly income of $3000 will give you the back end ratio of 51%.

51% back end ratio would be considered very high and you would have to have compensating factors.

When evaluating your own debt to income simply remember the new total housing payment + other debts that are required to be paid on the credit divided by your gross monthly income should give you an idea. The recommendations for an FHA loan are 31/43 which would include the additional payment of mortgage insurance. Dave Ramsey in his book The Total Money Makeover recommends that your housing payment or front end ratio should never exceed 25%.


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