Your Mortgage, Your Credit, Your DTI
Your debt to income ratio, also knows as “DTI,” helps lenders determine your mortgage eligibility. All of your monthly liabilities are divided by your gross monthly income resulting in a percentage. This percentage is your DTI. In order to qualify for a mortgage your DTI must not be over 40%-50%.
Here is an example:
An individual grossed $65,000 as annual income.
Monthly Liabilities are $2500.
Monthly Income is $5400.
DTI is 46%.
So the debt to income ratio is 46%? No - this gets even more complicated when lenders are determining approval. In this example it seems the DTI is 46%. However, the DTI is actually broken up into two figures/percentages: the front-end DTI and the back-end DTI. Now the monthly cost of housing must be factored in.
The back-end DTI represents all monthly liabilities vs. income; the front-end DTI represents monthly housing payments only with taxes and insurance vs. income.
Monthly Housing Costs are $1000.
In this case the housing costs per month total $1,000. The front-end DTI is therefore 18% creating an 18/46 ratio. Overall the back-end DTI is more important to lenders when examining risk and credibility but banks still calculate both numbers to create a ratio. In this example the final ratio would be 18/46 and would be compared to the required ratio of (for example) 35/45.
Your overall debt shows on your credit report. Your annual income doesn't show on your credit report, this information you would have to supply separately. But the banks can evaluate your current debt and your habits based on how your credit report and consequently determine the risk at hand if they should lend to you. So not only do mortgage lenders look at your actual credit score and credit history, they use the debt represented by your credit report to come up with another number to define whether or not you deserve to loan and own.
- Understanding Credit:
