What is DTI? How Is It Calculated? A Mortgage Expert Explains

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Debt-to-income (DTI) is an important financial metric used by mortgage lenders to evaluate the risk of a mortgage application. We’ll explain what DTI is, how it’s calculated, and why it’s so important to mortgage lenders.

DTI stands for debt-to-income ratio and is an important metric mortgage lenders use to evaluate your financial ability to pay your debts and absorb unexpected expenses. Basically, it compares your monthly debt payments to your gross monthly income.

Your debt-to-income ratio is a key part of the 4 “Cs” of mortgage qualifying, which are character, capacity, capital, and collateral. DTI is related to “capacity”, which refers to your financial ability to repay a mortgage loan.

How Is DTI Calculated?

Your debt-to-income ratio is calculated by dividing your total monthly debt payments, property taxes, homeowner’s insurance, and HOA dues (if applicable) by your gross monthly income.

For example, if your monthly income is $5,000 and your monthly debt payments, property taxes, homeowner’s insurance, and HOA dues add up to $1,000, your debt-to-income ratio is 20%. This would be considered a very low risk debt-to-income ratio.

Note that items other than just the standard loan or credit card payments can be included in your debt ratio, including child support payments, 401(k) loan payments, tax lien payments, cosigned loan payments, and “imputed” student loan payments (even if your student loans are deferred).

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Why DTI Is Important to Lenders

Lenders use debt ratios to assess the risk of lending to you. Mortgage lenders typically require you to have a DTI ratio of 43% or lower to qualify for a mortgage. However, FHA and VA financing often allow for higher debt ratios with compensating factors, such as reserves (cash, investments, etc.) and high credit scores.  

It’s important to be aware of your DTI ratio because it can impact your ability to get approved for a mortgage. A high DTI ratio indicates that you may be overextended and may struggle to make your monthly debt payments. This can result in missed payments and an increased risk of foreclosure.

On the other hand, a low DTI ratio can make you more attractive to lenders, which may result in better loan terms.

Expert Tip

Mortgage lenders evaluate two different debt-to-income ratios: a “front-end” ratio and a “back-end” end ratio. The front-end ratio compares just the monthly mortgage payment and property taxes and homeowner’s insurance to your gross monthly income. The back-end ratio compares the monthly mortgage payment, property taxes, and homeowner’s insurance and all other applicable debt obligations to your gross monthly income. Both ratios are important for mortgage qualifying.

Frequently Asked Questions

What does DTI stand for?

DTI stands for debt-to-income ratio and is an important metric mortgage lenders use to evaluate your financial ability to pay your debts and absorb unexpected expenses. Basically, it compares your monthly debt payments to your gross monthly income.

What is calculated into DTI?

Your debt-to-income ratio is calculated by dividing your total monthly debt payments, property taxes, homeowner’s insurance, and HOA dues (if applicable) by your gross monthly income.

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About Mike Roberts

Mike Roberts is the founder of MyHECM.com, a published author, and a highly experienced mortgage industry veteran with over a decade of mortgage banking experience. When he's not working, he enjoys spending time with his family, skiing, camping, traveling, or reading a good book. Roberts is the author of The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage, which is available on Amazon.