So, you have worked at your job for 2 years, you have a good credit score, you’ve filed your taxes, and you are getting really excited to get pre-approved to purchase a home. Then, just when you think you have all of your ducks in a row, and are starting to understand the purchase process, your lender throws out yet another acronym: DTI.
Simply put; DTI is your debt to income ratio. Generally speaking your lender gathers all of your bills + outstanding debt, tallies them up, and then divides that by your income to determine how much money you have available monthly to put towards a mortgage payment without overextending yourself. As most things with lenders, this is another risk assessment to assure you can pay your mortgage. This can get a bit confusing because there is a “front-end” and a “back-end” ratio. The “front-end” ratio is your threshold for housing costs; a.k.a mortgage and PITI. The “back-end” takes the “front-end” and adds your other monthly bills: credit card minimum payments, car payments, student loans etc.
The requirements for DTI ratios can vary by lender and by loan type. Our very convenient and informative Google explains DTI for us a little more technically.
The USA conforming loan limits are:
Conventional financing limits are typically 28/36.
- FHA limits are currently 31/43. When using the FHA's Energy Efficient Mortgage program, however, the "stretch ratios" of 33/45 are used
- VA loan limits are only calculated with one DTI of 41. (This is effectively equal to 41/41, although VA does not use that notation.)
- USDA 29/41
“DTI is the percentage of a consumer's monthly gross income that goes toward paying debts. (Speaking precisely, DTIs often cover more than just debts; they can include principal, taxes, fees, and insurance premiums as well. Nevertheless, the term is a set phrase that serves as a convenient, well-understood shorthand.) There are two main kinds of DTI, as discussed below.
- The first DTI, known as the front-end ratio, indicates the percentage of income that goes toward housing costs, which for renters is the rent amount and for homeowners is PITI (mortgage principal and interest, mortgage insurance premium [when applicable], hazard insurance premium, property taxes, and homeowners' association dues [when applicable]).
- The second DTI, known as the back-end ratio, indicates the percentage of income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments.
Now that you know about DTI, hopefully you understand that the less amount of monthly bills, and debt that you have, the easier it will be for you to be within the limits that the lenders require in order to lend you money to buy a home.
If you have any additional questions about DTI or getting approved to purchase a property please don’t hesitate to reach out!