Debt-to-Income Ratios (DTI)

People are always asking us about debt-to-income ratios. Here's what you need to know.

Each type of loan has a maximum allowable Debt-to-Income (DTI) ratio. However, if the loan is run through the automated underwriting software that is available from Fannie Mae, Freddie Mac, FHA, and VA, the maximum DTI ratios may be exceeded.

The DTI is calculated like this: Add all the monthly payments that show on the borrower’s credit report to the total monthly housing payment (principal, interest, taxes, insurance, mortgage insurance, and HOA fees). Then divide that number by the borrower’s gross monthly income (income before taxes).

The following table illustrates the maximum DTI ratios for both manual underwriting and automated underwriting (underwriting using the software):


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 NOTES: Compensating factors are things that add strength to the borrower’s loan file. Some of the more common compensating factors include excellent credit, very high reserves (money in the bank), and a large down payment (20% or more).

Front-end ratio = total monthly housing payment (principal, interest, taxes, insurance, mortgage insurance, and HOA fees) divided by the borrower’s gross monthly income.

Back-end ratio = Add the total monthly housing payments to the total of all the monthly payments on the credit report. Divide that number by the borrower’s gross monthly income.


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