What is a Debt-to-Income Ratio?

Jason Kauffman | December 21, 2022

As you begin the process of getting qualified to purchase a home, you may hear your mortgage professional talk about your debt-to-income ratios (also called DTI). Debt-to-income ratios are one of the key metrics used by underwriters to determine whether or not you qualify for a given loan. DTI shows the underwriter exactly how much of your gross income is being spent on the new mortgage payment and all your other debts.

How to calculate a debt-to-income ratio

Whenever we are discussing DTI, we talk in terms of percentages because we’re discussing a ratio. The way that you calculate a debt-to-income ratio is by dividing the monthly debt payments by the gross monthly income.

Example:

$3000 in Monthly Debts

$9500 in Gross Monthly Income

3000 / 9500 = 31.57% Debt-to-Income Ratio

Now that you understand how to calculate a DTI ratio, we should talk about the two different types of DTI ratios that are analyzed.

Front End Ratio vs Back End Ratio

When an underwriter is reviewing a loan for approval, they are looking at both the front end and back-end ratios. Different loan programs have different thresholds for each of these ratios, and some of the thresholds change based on other borrower characteristics (reserve funds, credit score, other compensating factors).

The front-end ratio is the ratio of the new mortgage payment to the total gross income. The back-end ratio is the ratio of the new mortgage payment plus any other monthly debts to the total gross income. More weight is given to the back-end ratio for qualifying, although there are some situations where the front-end ratio can affect your ability to qualify.

Example Calculating Front End and Back End Ratios:

$3000 in New Mortgage Payment

$1500 in other Monthly

$9500 in Gross Monthly Income

Front End Ratio Calculation:

$3000 / $9500 = 31.57% Front End Ratio

Back End Ratio Calculation:

($3000 + $1500) / $9500 = 47.36% Back End Ratio

So, what does all this mean?

Understanding how debt-to-income ratios factor into a loan approval can help you better understand the loan process. The first step is understanding how to calculate them. The second step is understanding how they are interpreted by an underwriter.

In general, the back-end ratio that an underwriter is looking for is at or under 45%. In some cases, you can go up to just under 50%. In other cases, you can go even higher. Each loan program is different as is each borrower scenario.

The complexity of understanding which loan programs have guidelines that fit your particular situation underscores the importance in having an experienced mortgage professional to guide you towards the programs that fit your particular situation. Their experience will help you get paired with the loan that is right for your particular situation.