Debt To INCOME Ratio
Debt To Income Ratio - DTI
Your Debt-To-Income ratio (DTI) represents the portion of your gross monthly income allocated to debt payments, aiding lenders in assessing your capacity to manage financial obligations. Two key DTI ratios, expressed as a percentage (e.g., 36/43), play a crucial role:
- Front-end ratio: The percentage of income dedicated to total monthly mortgage expenses being applied for, including mortgage principal, interest, hazard insurance, property taxes, mortgage insurance, and HOA dues if applicable.
- Back-end ratio: The percentage of income allocated to all recurring minimum monthly debt payments on your credit report, and other contracted obligations, combined with the mortgage costs in the front-end ratio. Common items include credit cards, car loans, student loans, personal loan, child support, alimony payments, and other relevant expenses.
*Note that items like utilities, rent payments, cell phone, internet services are NOT Included in the calculation. Items with < 10 months remaining may also be eligible for exclusion.
Lenders evaluate both ratios in the mortgage underwriting process, where loan eligibility is determined. The debt-to-income calculator focuses on the back-end ratio, considering your entire monthly debt. Alongside DTI, lenders assess your credit history, current score, total assets, and loan-to-value (LTV) ratio before making loan approval decisions.
43% or less - Ideal DTI Ratio
43.01%-50% - Marginal DTI Ratio
43.01%-50% - Marginal DTI Ratio
A backend debt-to-income ratio of 43 is optimal as it indicates to lenders you are not financially overextended. Your discretionary income is sufficient to allocate as needed for other monthly expenses and future savings.
43.01%-50% - Marginal DTI Ratio
43.01%-50% - Marginal DTI Ratio
43.01%-50% - Marginal DTI Ratio
Depending on the program being utilized, a DTI between 45% - 50% DTI likely the maximum range for eligibility. Items like credit score, down payment, reserves, and other assets come into play.
50.01% + - Excessive DTI ratio
43.01%-50% - Marginal DTI Ratio
50.01% + - Excessive DTI ratio
DTI in excess of 50% of your income is risky for you and for the bank. While this does not eliminate your chances at a loan, larger down payment, other expense paydown or changing your purchase price point may be needed to qualify.
Tips on lowering your DTI Ratio
- Ensure we are using all of your current income sources - i.e. overtime, support receipt, social security, pension, investment income, etc. More income = Lower DTI
- Pay down/pay off existing monthly bills - utilizing savings to pay these items can free up lending capabilities. Less Monthly Debt = Lower DTI
- Add a cosigner. If you have a spouse, family member or friend that is willing to cosign with you it brings their additional income to the scenario. It also brings in their credit score and debts so it is important to have discussions on the impact before we add them to the loan.
- Increase your down payment. Utilizing things like 401k loans or gifts from family may make the difference between approval and denial
- Lower the home price on your home search. This will lower your monthly payment.
- Renegotiate higher payment items to different terms - i.e. student loans, car notes installment loans. Adjusting the term to lower rates or longer payment terms will lower the monthly payment obligation.
