Debt to Income Ratio

What is Debt to Income Ratio? (DTI) – How much House can I afford Series

How Much House Can I Afford? – Home Affordability Series

What is Debt to Income Ratio? (DTI)

The Summary:

Debt to Income Ratio is your monthly debt payments divided by your gross monthly income (expressed as a %). In the case of a home purchase, you would also include your new proposed monthly housing payment in your monthly debt payments. For example, if your monthly debts are $200/month + a new proposed housing payment of $1400 ÷ $3,800/month income = 42% Debt to Income (or DTI).  Different DTI Ratios are accepted depending on different loan types, but a Qualified Mortgage (QM) should be under 43% DTI.

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The Detailed:

Debt to Income Ratio (DTI) involves two calculations:

  1. All of your current, minimum monthly payments (minus your housing costs), divided by your pre-tax income.
    • (Home Affordability Calculators say this percentage should not exceed 28 percent of your income.)
    • For example, if your monthly bills are $200, and your gross paycheck (or other business income) is $3,800, your top or front end DTI would be 5%.
      • ($200/$3,800 = 5.26%)
  2. All of your minimum monthly debt, plus your monthly home costs, divided by your monthly gross income.
    • To continue our example, if your desired total home costs are $1400/month ($1,200 month for Principal & Interest and $200 Month for Taxes = $1400/month PITI), your bottom or back-end debt-to-income ratio would be 42%.
      • ($200+$1400=$1600/$3800=42.10%)

When calculating your total debt, ensure you count both long-term and short-term debts. Consider:

  • Auto/Car Debt
  • Credit Cards
  • Student Loans
  • Any / All Other Debts

When calculating your total income, be sure to include:

  • Salary or Wages from Paycheck
  • Overtime from Paycheck
  • Bonuses from Paycheck
  • Commission from Paycheck
  • Net Rent
  • Anything additional (child support, alimony, etc.)

Different loan types affect how much you can afford. In 2017, regulators are more concerned with your bottom Debt to Income Percentage. Below are the maximum DTI Ratios the different regulators allow:

  • 41% DTI for USDA Loans (USDA Rural Development).
  • 45-50% Debt to Income for Conforming
    • (50% DTI with strong compensating factors, otherwise 45% DTI is more common)
  • 55% DTI for a FHA Loan
  • 60% Debt to Income Ratio for VA
  • 38% DTI for a Home Affordability Calculator (it’s important to note how the Home Affordability Calculators concentrate more on a suggested budget than what you may be approved to borrow.)
  • 43% DTI for Qualified Mortgage (QM)

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Debt to Income Ratio How much house can I afford

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