What is DTI and Why Is It Important? Mortgage Tips
What is DTI and Why Is It Important? Mortgage Tips
Happy Thanksgiving to all of you. I hope you’re enjoying some relaxing and fun time with your friends and family. This week I wanted to get into some terminology that’s used in the mortgage industry, that can be confusing for some people, because, let’s face it, we don’t all buy homes every day. We don’t take out mortgages every day.
So, some of this terminology can be confusing for people that don’t do this every day. I get annoyed by mortgage professionals and real estate agents that use fancy terms that people don’t understand, and expect people just to understand. So that’s why I wanted to do this in the next couple weeks.
I wanted to talk about this week that’s used very commonly is DTI. That stands for debt to income ratio. And essentially, what this is, is it’s the amount of your monthly debt payments that appear on your credit, divided by your gross income. So your monthly debt payments, divided by your gross income. And we use that to calculate a percentage, which is your DTI. So let’s take an example. Let’s say that your monthly expenses are $2,000 a month, including the mortgage payment you’re going to take on. And your monthly income is $8,000 a month. So, just to use easy math. That would be a 25% debt to income ratio. Now, there’s actually two parts of debt to income ratio. There’s what we call the front ratio and the back ratio.
So the front ratio, that’s only your housing payment. So let’s say out of that $2,000, your housing payment is $1,500. So in that scenario, your debt to income ratio, your front end debt to income ratio, I’m just doing the math on my calculator down here, would be 18.7. And then, let’s say that extra $500, that’s a car payment and a credit card payment or whatever it is. So then your total debt to income ratio or backend debt to income ratio would be 25%.
So I hope that helps you guys understand that term.
