Last Updated on 11/30/2022 by Mark Verhoeven
What Is the Debt-to-Income (DTI) Ratio?
Lenders use the debt-to-income (DTI) ratio to measure your borrowing risk. It is the percentage of your gross monthly income that goes to making your monthly debt obligations.
Debt-to-Income ratio explained
Debt-to-income ratio (DTI) is the percentage of a consumer’s monthly gross income that goes toward debt repayment in the consumer mortgage business. DTIs can comprise more than simply loans; they can also include principle, taxes, fees, and insurance premiums. Nonetheless, the term has become a standard shorthand that is widely understood.
A low DTI ratio indicates that debt and income are in excellent balance. In other words, if your DTI ratio is 15%, it means that 15% of your monthly gross income is dedicated to debt repayment. A high DTI ratio, on the other hand, indicates that an individual has too much debt for their monthly income.
Borrowers with low debt-to-income ratios are more likely to keep up with their monthly debt payments. As a result, before giving a loan to a potential borrower, banks and financial credit providers look for low DTI ratios. Lenders favour low DTI ratios because they want to make sure a borrower isn’t overextended, which means they have too many loan obligations compared to their income.
How to calculate DTI
- The debt-to-income (DTI) ratio compares a person’s monthly debt payment to their monthly gross income. Your gross income is the amount you earn before taxes and other deductions.
- The debt-to-income ratio is the percentage of your monthly gross income that goes toward debt payments.
- Add up all of your monthly debt payments, including credit card, loan, and mortgage installments.
- Subtract your total monthly debt payment from your gross monthly income.
Because the answer will be a decimal, multiply it by 100 to get your DTI percentage.
Different types of DTI
There are two main types of DTI:
The front-end ratio is the percentage of income that goes toward housing costs, which include rent for renters and PITI (mortgage principal and interest, mortgage insurance premium, hazard insurance premium, property taxes, and homeowners’ association dues) for homeowners.
The back-end ratio is the percentage of income spent on all recurring debt obligations, including those covered by the first DTI, as well as other debts including credit card payments, vehicle loan payments, student loan payments, child support payments, alimony payments, and court judgments.
Summary of Debt-to-Income ratio
- The debt-to-income (DTI) ratio analyses how much money a person or company makes in order to pay off debt.
- The most DTI a borrower can have while still qualifying for a mortgage is 43 percent, however lenders normally prefer ratios of no more than 36 percent..
- A low DTI ratio implies adequate income in relation to debt servicing, making a borrower more appealing.
If you have any other questions regarding Debt-to-Income Ratios contact the mortgage experts at 864-397-8500 or click Mortgage Rates Today!
Location: Greenville, South Carolina
Education: MBA University of South Carolina
Expertise: Mortgage Financing
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