Debt to Income Ratio, or DTI
In mortgage lending, a borrower's ability to qualify for financing considers, in part, their debt to income ratio, or DTI. DTI is calculated in arriving at the maximum monthly mortgage payment, as it also takes into consideration your other liabilities (ie auto loan, student loan, credit cards).
About the qualifying ratio
In the past, underwriting for conventional mortgage loans considered qualifying ratios of 28/36. In other words, no greater than 28% of your gross monthly income should service your current/proposed housing payment (loan repayment PLUS taxes and insurance) and no greater than 36% of your gross monthly income should service ALL of your payments (housing PLUS auto loans, student loans, credit cards). While there is a focus on the 'front-end' ratio, it is the 'back-end' ratio which is of significant importance in the current marketplace.
In the lead up to the '08 Global Financial Crisis (GFC), this 36% 'back end' figure moved into the 40%, 50%, even 60% range. With the GFC bringing about change in the mortgage industry, today's conventional back-end housing ratio maximum is 'typically' 45%. In other words, no greater than 45% of your gross monthly income should service your proposed housing payment AND all other payments (auto, student, credit cards). I say typically, as exceptions to a 50% conventional housing ratio ARE possible, given overall strength of application (ie down payment, credit scores, assets).
Some example data:
A 45% qualifying ratio
- Gross monthly income of $10,000 x .45 = $4,500 can be applied to housing payment PLUS all other payments (auto, student, credit cards).
If you'd like to calculate pre-qualification numbers with your own financial data, we offer a Loan Pre-Qualification Calculator.
While the above represents DTI consideration under a conventional loan offering, an FHA loan OR a VA loan may approve you at a greater than 50% housing ratio. Together, we will arrive at the loan program which will afford you desired loan approval.