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# Total Mortgage Services' Blog

By Total Mortgage Services, LLC | Mortgage Broker
or Lender in Connecticut

# What is Debt-To-Income Ratio?

Debt-to-income or DTI ratio is one of the key factors mortgage lenders calculate to determine whether borrowers can afford mortgage loans they have applied for or not. The debt-to-income ratio is calculated by dividing the total monthly debt payments by the total monthly income. Monthly debt payments generally include expenses such as mortgage payments, auto payments, student loan payments, credit card payments, and child support payments. Monthly expenses such as utilities, auto insurance and phone services are not included towards the monthly debt calculation. Monthly gross income generally includes the borrowerâ€™s monthly income, his/her spouseâ€™s monthly income, any savings income or any other business or side incomes.

Let us consider an example of a borrower looking to purchase a house. To calculate his/her debt-to-income ratio income let us assume the monthly debt payments include the following:

Monthly Mortgage Payment: \$1200
Monthly Auto Payment: \$500
Credit Car payment (minimum): \$300
Total Monthly Debt Payment = \$(1500+500+500) = \$2000

Suppose the monthly incomes are as below:

Borrowerâ€™s Monthly Salary: \$3500
Spouseâ€™s Monthly Salary: \$2500
Other Income: \$500
Total Monthly Income= \$(6000+2500+500) = \$6500

Debt-to-Income Ratio = Total Monthly Debt Payment/Total Monthly Income = (2500/6500) = 30.76%

A lower DTI ratio is considered better as less debt means the borrower is financially more sound and has a better opportunity to get a better mortgage loan. Therefore a lower debt-to-income ratio indicates that the borrower has a higher chance of repaying the debt compared to a borrower who has a higher debt-to-loan ratio and may have more trouble finding affordable mortgages.

In mortgage loans, lenders typically consider two kinds of debt-to-income ratios. First is the front ratio, which includes all the housing costs such as the mortgage principal, interest, mortgage insurance premiums, and property taxes. The second is the back ratio, which includes non-mortgage debt such as credit card payments, auto loan payments, child support payments, and student loan payments. Generally, lenders prefer less than 28 percent for a front ratio and 36 percent for a back ratio.

Lenders require different mortgage debt-to-income ratio depending on the mortgage type. For conventional mortgage loans, DTI ratios are typically 28/36 and a FHA mortgage loan has a DTI limit of 31/43. Debt-to-income is an important way to monitor ones expenses and buying power and help people in taking control of their expenses as well as keep track of them.