The Debt-To-Income Ratio Explained

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Dear Kim,

I am considering buying my first home. I have been doing some research and keep hearing about debt to income ratio. What exactly is the debt-to-income ratio and how does it affect my mortgage application?

Dear Reader,

The debt- to- income ratio, or DTI, is a ratio that lenders use to determine how much of your monthly income is being used to pay your debt.  There are two types of debt-to-income ratios, front end and back end. The front- end- ratio consists of your home related expenses. The mortgage payment, property taxes, insurance and homeowner association fees are divided by your monthly gross income.
The back-end- ratio consists of your total monthly debts including mortgage, property taxes, homeowner association fees, credit card payments, child support and other loan payments. This total is then divided by your monthly gross income. Lenders tend to focus on the back end debt-to-income ratio when considering you for a conventional mortgage.
Lenders become concerned when an applicant has a high DTI ratio. An applicant with a high DTI may have trouble repaying all of their debt obligations, creating a higher risk borrower. Your goal should be to have a front end DTI of below 28% and a back-end DTI of below 36%.  There is a bit more flexibility when applying for an FHA loan.
Debt –to- income ratios are just one tool used in mortgage determination.  DTI ratios should not be used to determine how much of a mortgage you can truly afford.  The DTI does not consider your expenses such as food, gas, utilities, clothing, health costs, and more. I recommend that you have a solid budget in place with an appropriate emergency fund to help with that decision. I also advise you to have a pre-purchase housing counseling session. Navicore Solutions is approved by the U.S. Department of Housing & Urban Development (HUD) to provide housing counseling services. Please call 1-866-472-4557 to speak with a certified Housing Counselor.
Good Luck!
Kim Cole is the Education Outreach Coordinator for Navicore Solutions. Kim provides financial education workshops and seminars to communities. Readers can submit general questions relating to personal finance, credit scoring, debt management, student loans, home finance or bankruptcy which may be highlighted in the next month’s edition.