When applying for a mortgage, your lender will calculate your Debt-to-Income ratio (DTI). This number is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.
DTI is split into two categories – front-end and back-end. Front-end will include your mortgage and anything related to the mortgage – monthly principal, insurance, taxes, and insurance. The back-end will include the front-end and any car loans, personal loans and credit card debt payments. They are added to your projected mortgage to figure out how much new debt you can afford.
To find DTI, lenders will add up all your monthly debt payments and divide the amount by your gross monthly income—monthly income before taxes. That will show you what percentage of your income is going toward paying off debt.
Here’s an example of a DTI calculation for a W-2 employee with no bonuses:
Monthly liabilities: $2,600
Monthly gross income: $10,000
Divide your monthly liability by your monthly gross income: 2,600/10,000 =.26
The Debt-to-Income is 26%.
What DTI will lenders be looking for?
The maximum debt-to-income ratio will vary by mortgage lender, loan program, and investor, but the number generally ranges between 40-50%. Applicants with an elevated DTI must show strength on some other aspect of their application.
Requirements and calculations for self-employed and anyone who receives bonuses will be different.