What is Debt to Income Ratio?

DTIs

When you’re looking for a home, your vocabulary will randomly grow. Debt-to-Income ratios, or DTIs as they are commonly called, is a new term and can be a bit tricky to explain.

Types of DTIs

First, let’s clarify a few things. There are two kinds of DTIs, Front-End and Back-End. These ratios help the bank decide whether or not they think you’ll have the income to cover the cost of the loan. This actually protects both you and the bank, ensuring that neither party is biting off more than they can chew.

Front-End DTI

Let’s discuss the front-end ratio first. This formula takes the gross income of the parties interested in borrowing and calculates how much of their income would be needed to cover their housing costs. Don’t make a mistake and think that this is just a mortgage. This is your montly mortgage payment, your PMI (mortgage insurance), closing costs or other fees associated with purchasing your home.

Depending on the ratio, your bank will either refuse the loan, or offer it at a certain interest rate. Typically, no more than ⅓ of your monthly income should be going towards housing costs.

The Back-End DTI

Next, the back-end DTI. This ratio takes into account how much of your gross income is dedicated to paying back debt. This includes credit card debt, cell phone bills, your car payment, mortgages, etc.

These two ratios help the bank paint a picture, finacially of those who are applying for mortgages. Keeping your debts and monthly payments low will lower the back-end DTI, while increasing your down payment or finding a less-expensive home can help your front-end DTI.