Debt to Income
What in the world is DTI?
Let us show how you can do this very simple calculation on your own and explain exactly what it is we are speaking of. DTI stands for Debt to Income ratio. A person has monthly debts and monthly income and the DTI represents the ratio between those two numbers. A lot of people never hear of this until they start looking into purchasing a home. We are not taught about DTI in money school, only budget, pay your bills, save your money and then you can buy a home. But there really is a little more to it.
The following might get a little more complicated before it gets easier, so let’s press on! There is front-end DTI and Back-end DTI. Lets break down the two:
Front End DTI:
Front-end DTI takes into account only the monthly housing expenses such as monthly mortgage payments, the monthly property tax bill, monthly homeowner insurance and monthly homeowner association dues, if there are any. To figure out the front end DTI add all of the above items and divide by your monthly gross income.
Example:
Monthly mortgage: $950.00
Monthly property tax: $150.00
Monthly insurance: $135.00
HOA: $75.00
Total: $1310.00
Income each month before taxes: $5000.00
$1310 / $5000 = .26 or Answer: front-end DTI is 26%
In our example, the front-end DTI percentage means 26% of your monthly, before tax, income is going toward housing debts.
Back End DTI:
Now we will account for your other monthly obligations and calculate the back-end DTI. List all of your monthly bills such as your credit card, student loans, child support or other type of monthly debt. *Notice the calculation does not take into account monthly home bills like power, water, groceries or even car insurance, only items which are currently in a debt like status.
To figure the back end DTI, take all your monthly debts including your front end housing payment and divide by your monthly gross income:
Example:
Total of front end DTI: $1310.00 (our previous calculation)
Chase credit card: $75.00 per month
Student loan: $300.00 per month
Grand Total: $1685.00
Income each month before taxes: $5000
Again, take your total monthly debts and divide by your monthly gross income.
$1685 / $5000= .33 or Answer: back-end DTI is 33%
Did you calculate your DTI? How do you stand? Do you need to begin paying down those debts to better your Debt to Income ratio?
When purchasing a home many lenders look at your debt to income ratio as a starting point. They take into account all of your information and basically paint a picture of you as a borrower. While it may sound simple this may not always be the case and we recommend you filling out an online loan application by clicking on the link above and setting an appointment with one of our Mortgage Professionals.