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Your Debt-to-Income Ratio: What It Is and Why You Should Care

Written by Matt Jabs - 37 Comments

Think back to the last time you financed a purchase — be it a home, automobile, or what have you… You may remember having heard the term “debt-to-income ratio.” Today I want to spend some time going over exactly what this ratio is, and to also touch on how it can effect your personal finances.

What is your debt-to-income ratio?

Commonly referred to as your “DTI,” your debt-to-income ratio is a personal finance benchmark that relates your monthly debt payments to your monthly gross income.

As an example… Let’s say that your gross monthly salary is $5,000 and you are spending $2,800 of it toward monthly debt payments. In that case, your DTI would be an unhealthy 56%.

This version of your DTI is sometimes referred to as your “back-end” DTI. This is often broken down further to give a front-end debt-to-income ratio, which is a component of your back-end DTI.

How to calculate your front-end DTI

Your front-end DTI is calculated by dividing your monthly housing costs by your monthly gross income. Front-end DTI for renters is simply the amount paid in rent, whereas for homeowners it is the sum of mortgage principal, interest, property taxes, and home insurance (i.e., your PITI) divided by gross monthly income.

From above, if that $2,800 in debt payments is attributable to $1,500 in housing costs and $1,300 in non-housing costs, then your front-end DTI is $1,500/$5,000 = 30% (and your back-end ratio is still 56%, as calculated above).

How lenders use your DTI

Mortgage lenders typically use DTI (along with other variables) to determine whether or not you qualify for a loan, and to help determine your mortgage rate. A high front-end DTI raises red flags with lenders because it is commonly associated with borrower default. In fact, reducing front-end DTI to reduce the risk of homeowner default was one of the main objectives of the loan modification programs introduced by the government in 2009.

There are specific limits for DTI that are used as cut-off points when evaluating borrowers. Current DTI limits for conventional conforming mortgage loans are typically 28% on the front end and 36% on the back end, though these limits are slightly higher for government subsidized FHA loans.

While there are certainly other factors to consider when determining our eligibility for financing (e.g., credit score, etc.), your DTI is an important determinant that you should be aware of. By working to improve it, you can make yourself a better credit risk, and thus get more favorable treatment from lenders.

Two obvious ways to improve DTI are to increase your income and/or decrease your debt. Both are solid goals.

What is your DTI?

I just figured our current household DTI. Our front-end ratio is 15%, and our back-end ratio is 24%. What is yours?

Published on January 14th, 2010 - 37 Comments
Filed under: Debt Reduction, Mortgages

About the author: is a thirty-something IT manager and blogger who wants to help himself and others get out of debt. He writes about personal finance and debt-free living at Debt Free Adventure.

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37 Responses to “Your Debt-to-Income Ratio: What It Is and Why You Should Care”

  1. 1
    Chris Thorpe Says:

    Since my only debt is my mortgage, my front end and back end ratios are both 14%. If I count what I pay extra toward my mortgage (just curious to see what this # would be), my back end ratio would be 23%.

  2. 2
    R S Says:

    Only mortgage debt as well, making my front-end DTI 36% but I make extra payments, bringing it up to 42%. (I qualified for the loan w/ a 49% DTI, and the bank was even willing to give me more in 2008 :-\).
    Back-end is 59%, which is because I pay for everything on credit and pay it off in full each month.
    Is the back-end calculated with what you actually pay? Or the minimum payments? When I did a refi a couple months ago, I remember the loan officers summing the minimum payments, not the actual balances..

  3. 3
    Spoco Says:

    23/43 here. We have got to get out of this debt. We are actually paying 23/62.

  4. 4
    John Says:

    I just bout my house 3 months ago. I am currently at about 21/29. Last month I paid 42/65, which I don’t think I can maintain but I had some left over from the previous month. I can probably maintain a 55-60% payment ratio month to month.

  5. 5
    Live for Improvement Says:

    21/41 Only because of a car payment, and credit card payments.I plan to be free of credit card debt in the next 6 months.

  6. 6
    Floridian Says:

    using required payments: 12% (mortgage)
    using what we actually pay: 19%

    BTW – it’s princiPAL (not princiPLE) when referring to that portion of the debt payment ;)

    Note from nickel: Spelling fixed, thanks!

  7. 7
    Courtney Says:

    Housing costs plus a small low-interest student loan currently puts ours at 14/15 (bought in 2005 while I was still in grad school; I’ve nearly doubled my income since then and hubs has gotten several raises as well). It’s about to go down to 12/13 sometime next month, as I’m getting ready to change jobs with another substantial salary increase.

  8. 8
    Lee Says:

    Ours is 14% front, 16% back. Working hard toward 0!

  9. 9
    Bodark Says:

    Another way to look at it. The percent of debt you have, can roughly be applied to your day. So if you owe 25% of your income to someone else. Your first two hours of an eight hour day go directly to someone else – your just there for free.

    I know – it’s an oversimplification of sorts. But think if you don’t owe anybody (excusing Uncle Sam), then you are just working the amount of hours you want, rather than working the amount of hours you need to cover debt.

    Just another random way to look at it.

  10. 10
    BG Says:

    5/7 for me (I hate debt).

    We are making double mortgage payments at this point, working to get to 0/0 like Lee is. Well, technically, I’ll never get the front-end ratio to zero since I’ll always have property taxes and insurance, so best I can get to right now is: 0/2.

  11. 11
    BG Says:

    Oops — I screwed up my math above. My ratios are actually 14% / 19%. Great article Matt!

  12. 12
    Matt Jabs Says:

    Great questions.

    Lenders calculate your DTI based on your minimum debt obligations, but as most of you have done… it is a VERY healthy exercise to calculate your own DTI based on the accelerated payments you are actually making.

    @Floridian: the spelling of the word “principle (pal)” is going to be the death of me! ;-) I always confuse those, thanks for reminding me.

  13. 13
    Matt Jabs Says:

    @Bodark: Oversimplification? Probably… but I love the concept.

    @BG: Excellent point about never being able to get your DTI to 0 for those who own homes, due to property taxes and home insurance… I did not think of that, and I’m sure many others missed it too.

  14. 14
    Jim Says:

    I have rentals with mortgages so I’m not sure how you add those into the mix.

    Without rental income or rental mortgages our DTI is 12.5%.
    With rental income & mortgage plus normal income DTI is 26%.

  15. 15
    Courtney Says:

    One other thing that isn’t mentioned (but I included it in my home ownership costs above) is home owners association dues.

  16. 16
    Troy Says:

    Corrections:

    The maximum FNMA/FLMC ratio’s are 45%. 41% with PMI

    Front and back don’t matter tomortgage lenders. I am one. You can have 43/43, or 23/43. Doen’t matter on conventional loans.

    And impounds/escrows for taxes and insurance, while used in calculations in the mortgage industry should not be used once the loan is paid off. Your DTI would be 0/0. It is used because it is a known component of the obligation, not becasue it is a debt. Taxes and insurnce are an expense, not a debt. Like utilities and maintenece are not included. If you are debt free, your DTI is 0

  17. 17
    Rosa Says:

    Our DTI is 14%, the extra payments we make put it up to 16%.

    That’s crazy. I never thought to check it against our gross instead of our net before. No wonder people say they “can’t afford” to pay for retirement, if they’re taking on debt payments at 30% of their gross income.

    We pay a *lot* for daycare, though – our fixed expenses to gross income is 33%.

  18. 18
    Amy Says:

    I have no front end (no mortgage debt, no HELOC or loan), and back end (if I’m doing the math right) is 9% (we have one car payment and one payment to Sears). I am not counting a credit card we pay off monthly (we use it for cell phone bills, medical, groceries, gas, insurance, etc.)

  19. 19
    John Says:

    Why do you think Mondays are so awful? Everyone spends most of the day paying Uncle Sam. Then most people spend Tuesday and part of Wednesday paying debts.

    It takes me more than half a week to start making money for myself. The way I am paying debts right now, Monday pays Uncle Sam. Tuesday through noon Thursday are for my debts and Thursday afternoon and Friday covers my living expenses and savings. Maybe I should get a weekend job so I can have enough money for more fun! :/

  20. 20
    Matt Jabs Says:

    @Troy #16: FNMA/FHLMC limits are correctly stated in the article… you are making reference to FHA and VA limits which are 31/43 and 41 respectively.

    Great point on the taxes & insurance no longer being a factor once the loan is paid off. After all, like you said, they are not debt.

    @Rosa #17: Yeah, I cannot imagine having the high DTI that some consider acceptable now-a-days… heck, I hate mine being at 15/24!

    @John #19: Thanks for that John, I love thinking of my debts & expenses literally like that. I’ll have to do that.

  21. 21
    JoeTaxpayer Says:

    Matt,
    We are just under 15%. Mortgage only, no other debt.
    Glad to see that 28/36 is still the norm for proper mortgages. Had banks stuck to this, the bubble and crash may never have occurred.

  22. 22
    Matt Jabs Says:

    @JoeTaxpayer: Nice Joe, I’ll be there ASAP! Definitely glad too… another reason I love doing business with banks who kept historically low interest rates, even through “the bubble building years.” Reward the responsible.

  23. 23
    Troy Says:

    Matt:

    I assure you I am correct. I am not discussing HUD loans.

    Conforming Fannie/Freddie max ratio’s are 45%. With compensating factors they can still actually go to 50%. I do them EVERY DAY.

    28%/36% ratio’s have not been conforming maximums for 20 years. Until 11/2009 the maximum Fannie/Freddie ratio’s were actually 55%. They were recently lowered to 45%.

  24. 24
    BG Says:

    #23 said: “…With compensating factors they can still actually go to 50%. I do them EVERY DAY….”

    Great, so we are no where near the end of this crisis — sounds like we are still making the problem worse. I don’t blame you, Troy, but I blame Fannie/Freddie for still subsidizing these ridiculous mortgages.

  25. 25
    Ronnie Says:

    Me and hubby are 14/29, which actually amazes us. That’s based on minimum expenses. Based on what we actually pay, our back-end DTI goes up to 37. Hopefully by next year we can get it down to 26, where it’ll stay for a while (student loans). Good article. It’s nice to see exactly how lenders might view our numbers, which I must say is much more favorably than we do! No way we’re trying to buy a home with the back-end number as it now stands.

  26. 26
    Matt Jabs Says:

    @Ronnie: Yeah, lenders definitely think we can borrow more than we probably should! :-)

  27. 27
    CharlieBoy Says:

    Well, first off, I have finally learned NOT to care about what mortgage lenders tell you regarding what YOU can afford because their formulas are not taking the need for emergency money into consideration. They don’t care if you might struggle to make those mortgage payments every month. They tried to tell me I could afford much more house then I could ever need with a huge mortgage payment each month. So I decided what I could afford in order to be able to sleep well at night. I bought much less house, and the result has been a 15-year mortgage payment that I am actually able to double each month. If I had bought a more expensive house like I was told I could afford, I would be paying my house through what what feel like eternity. And don’t even get me started with car payments because I am convinced that Americans have the wrong idea that having car payments throughout their working lives is normal. I disagree. I think having car payments for years and years is a huge financial mistake because we are pouring money into something that will rust and never produce one cent in income.

  28. 28
    Terry Says:

    So if renter A has a utilities-included rent payment of Z = X rent plus Y utilities and renter B pays separately X rent and Y utilities totalling Z, renter A has a higher DTI than B?

    Who comes up with this stuff?

  29. 29
    Terry Says:

    I don’t understand how people “can’t afford” 40% or even 30% of their income for mortgage payments.

    My DTI ratio (rent (not including utilies) 50% plus 7% debt) is 57 percent.

  30. 30
    Matt Jabs Says:

    @Terry #28: Yes, but only if their base rent and income are exactly the same and renter B’s rent is higher because of a built-in “utilities included” rent payment.

    Regardless, the difference here is so minimal it will probably land both renters in the same DTI numbers (assuming again all other financials are identical.)

    @Terry #29: I don’t understand why people would want to.

  31. 31
    BG Says:

    #29) We’d have to _quadruple_ our monthly mortgage payment to hit 57% DTI. Either you are earning a ton more than me, or you must be superman to afford that kind of rent. Wow.

  32. 32
    FinanciallySmart Says:

    @Charlie Boy I am in total agreement with you. One can give you an advice but its up to the individual to know that it is he/she who will be struggling for years and so in preventing this choosing one that is easier is better. Debt should not be a yearly occurrence but one that we should avoid.

  33. 33
    Nelson Says:

    I’m in the market right now to try and qualify for a mortgage. I’ve just paid off all my crdit card bills, but I still have my car payment and student loans. A loan advisor told me that they would have to factor my student loans into the DTI, even though they are currently in forbearance. Because of this, my back-end DTI is at about 43%, even though I am only making car payments at this time. Are there any loan options out there that can get me qualified with only 3% down (i.e. FHA)? My intention was to put 20% down to forego PMI (thinking that they wouldn’t count my student loans), but because of this I just ended up paying off all my credit cards with the intended down payment money, which will only leave me with a 3% max down payment that I can afford right now for a place. I wanted to get a place before Apr 30th to qualify for the Obama first-time home buyers credit, but now I don’t think that’s possible (or is it)?

    Any advice would be greatly appreciated.

  34. 34
    mary Says:

    only owned 24.193.00 on the home in 1999 have paid over34,000.00 or more how do I figure the % I think was 10% then when can I know if the house is paid for?

  35. 35
    SDub Says:

    Curious to see how Nelson made out with the home buying with a backend at 43%…

  36. 36
    legaleagle Says:

    Mary,

    Your original loan paperwork will show how long your loan is for & when it will be paid off making regular payments. No one can tell just by the amount of money you paid because it depends how much you were paying towards principal (or if you were only paying interest) and how long the long amortization (loan term) is/was.

    Most of the time a “regular” mortgage loan at 10% will involve paying 2-3 times more in interest than the amount you originally borrowed. For instance, if you borrowed $50,000 at 10% on a 30 year loan, you would likely owe about $150,000 total ($100,000 in interest and $50,000 in principal)

    To get exact figures, you can either do an online mortgage amortization calculator and find out by putting in the loan details (start date of mortgage, interest rate, # of years the loan is for, regular payments, any extra payments made, etc.) OR simply call your lender to get the principal balance owed today. 10% is an extremely high interest rate in this market, if it is not paid off might want to consider re-financing.

    Hope this helps!

  37. 37
    Hink424 Says:

    Im slightly confused on what debts are added to determine the DTI ratio. If I had a few medical bills that were sent to collection, do I add that amount as well?

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