Debt To Income (DTI) Ratio
One of the first things a mortgage professional will calculate for you is your debt to income ratio or DTI. This will help reveal how much money (if any) the bank will be willing to lend you. This ratio, along with other factors, convey how high or low of a risk you will be to lend money to.
The DTI is figured with a couple different numbers usually known as the “front” and “back” ratio, usually notated in the following format: F/B.
The front ratio (F) represents the percent of income that goes toward basic housing costs. For someone who rents, that is your rent and insurance if applicable. For homeowners that number stands for your mortgage (principle, interest, taxes and insurance), hazard insurance and homeowners’ association dues, if applicable.
The back ratio (B) notates the percentage of income designated towards all recurring payments (including housing expenses). This number will contain such things as car loans, student loans, credit cards, and legal judgments such as child support or alimony.
For a standard conventional loan, those numeric limitations are always 28/36. Meaning if you are calculating the front ratio (F), your income vs. housing expenses must not be more than 28%. Similarly, if you are calculating your back ratio (B), all your recurring expenses must make up 36% or less of your income.
FHA and VA loans have their own set of rules that differ from conventional loans, however. FHA DTI limits are 31/43 and VA is (essentially) 41/41, although they do not use this particular notation. For help calculating yours, see your favorite lender, bank or credit union.
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