"DTIs," or "Debt to Income Ratios," are a key calculation that is used when applying for a mortgage to refinance, consolidate debt, or buy a home. Divide your monthly debt payments by your income before taxes to get your debt-to-income ratio. Finally, debt-to-income ratios (DTIs) are used to figure out how much money you can borrow. If you know a lot about DTIs, you can get the most out of your refinance, debt consolidation, or mortgage purchase.
A Front End Ratio (or "Front Ratio") and a Back End Ratio (or "Back Ratio") are two types of debt to income ratios that are used in refinancing, consolidating debt, or getting a mortgage to buy a home (or "Back Ratio").
The Front Ratio is found by dividing your total monthly housing costs, which include your mortgage payment, including principal, interest, taxes, and insurance, as well as homeowner's association fees, mandatory maintenance fees, common charges in a development, and mortgage insurance, if you have it.
The Back Ratio is similar to the Front Ratio, but it takes into account your other monthly debt payments, especially those for consumer debt, as well as your basic housing costs. Monthly consumer debts include things like credit card bills, car payments, personal loans, student loans, and so on. Life, health, and car insurance premiums are examples of things that are usually not part of a back end ratio.
When your lender looks at your application, they are actually trying to match it to the lending criteria for the programme you want to see if you meet the requirements for the loan. The debt to income ratio is one of the most important things that determine how much money you can borrow and at what rate. A conventional mortgage programme for people with good credit will usually have a debt-to-income ratio requirement of 33/38, which means that your monthly housing costs should be less than one-third of your monthly gross income.
If you make $3,000 per month, the most you could pay for a mortgage under a 33/38 programme is $1,000 per month, which includes principal, interest, taxes, insurance, and other housing costs. Your total monthly spending, including your mortgage, credit cards, and other consumer debts, cannot be more than $1,140. This may seem like a very cautious move, and it is. If a traditional bank turned you down for a mortgage refinance, debt consolidation loan, or loan to buy a new home, it was probably because your programme had a low debt to income ratio.
Many modern lenders don't care about the back end ratio at all and only look at the front end ratio. In the case of a VA loan for a veteran, their rules only look at the back ratio and don't care about the front end ratio. FHA loans let you take on more consumer debt, but you must have a higher income. The standard ratio of debt to income is 29/41 (front/back).
Progressive lenders now have programmes with great rates that let people borrow up to 100% financing and, in some cases, up to millions of dollars. These programmes have even better rates than many 33/38 programmes, but they also let people have up to 55% or even 60% of their income go toward debt. This is true whether you show your income with tax returns and W2 forms or just say how much you make. With these more flexible debt-to-income ratio rules, you can borrow money without worrying about being turned down. These rules can be made even more flexible if you have good credit and a big down payment when buying a home or equity when refinancing or consolidating debt. Debt consolidation programmes are often easier to get into if you require that certain consumer debt accounts be paid off directly. This lowers your monthly payments on consumer debt. Talk to a national mortgage broker so you can choose from a wide range of programmes. Tell your loan officer the truth about your income and debts, and everything will go smoothly. Don't forget that they want to help you get the money you need and will work with you to do so.
