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DTI is a component of the mortgage approval process that measures a borrower’s Gross Monthly Income compared to their credit payments and other monthly liabilities. Debt-to-Income Ratios are designed to give guidance on acceptable levels of debt allowed by particular lenders or programs.
There are actually two different Debt-to-Income Ratios that underwriters will review in order to determine if a borrower’s monthly income is sufficient to cover the responsibility of a mortgage according to the particular lender / mortgage program guidelines.
Most loan programs allow for a Total DTI of 43% and a Housing DTI of 31%.
Two Types of DTI Ratios:
a) Front End or Housing Ratio:
Should be 28-31% of your gross income
Divide the estimated monthly mortgage payment by the gross monthly income
b) Back End or Total Debt Ratio:
Should be less than 43% of your gross monthly income
Divide the estimated Bay Area house payment plus all consumer debt by the gross monthly income
Remember, the DTI Ratios are based on gross income before taxes. Lenders also prefer to use W2’s or tax returns to verify income and employment.
However, the adjusted gross income is used to calculate DTI for self-employed borrowers on most loan programs. Since there is room for interpretation on these guidelines, it’s important to review your personal income / employment scenario in detail with your trusted mortgage professional to make sure everything fits within the guidelines.
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