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Debt-to-Income Ratio

Debt-to-income ratio, also known as DTI, is the relationship between a consumer’s monthly debt payments and income. This may be referred to as DTI, back-end ratio or bottom ratio. It is calculated by adding the monthly payments of accounts like credit cards, auto loans, student loans and housing (rent or mortgage) and dividing that by the gross (before tax) monthly income. It does not include living expenses like utilities or food.

How is it calculated?

DTI is calculated by adding the monthly payments of accounts like credit cards, auto loans, student loans, and housing (rent or mortgage) and dividing that by your gross (before tax) monthly income. It does not include living expenses like utilities or food.

DTI Sample Calculation

Imagine that a couple earns $6,000 per month before taxes and has the following bills:

Credit card minimum payments of $250

Auto loan payments of $500

Student loan payment of $250

They’re applying for a mortgage with a payment of $1,250 for principal, interest, taxes and insurance

If the applicants are approved for this mortgage, their total monthly bills will come to $2,250. To calculate their DTI, mortgage underwriters would divide $2,250 by $6,000. That equals .375, or 37.50 percent. A DTI or less than 38 percent is acceptable under most mortgage loan programs. Fannie Mae, for example, imposes maximum DTIs of 36 to 45 percent, depending on the applicant’s credit rating and down payment.

Front-end Ratio

Some lenders also perform another debt-to-income calculation. It’s called the front-end or top-end ratio, and consists of housing-related expenses divided by gross monthly income. In this example, the front-end ratio equals $1,250 / $6,000, or 20.83 percent. Most lenders consider the back-end ratio more important, but guidelines often limit front-end ratios as well – 28 to 31 percent is typical.

Note that housing-related expenses could include flood insurance, homeowner association (HOA) dues, mortgage insurance and additional property tax or HOA assessments.