Your credit score is high and you always pay your bills on time — you should have no trouble getting a home loan, right? Not necessarily. Your debt-to-income ratio, or DTI, is a measure of your debt as it relates to your income. This figure, not your credit score, is the number-one concern of lenders when considering whether to approve home loans.
How does your DTI measure up? Use this quick and easy calculator to find out.
Gross Monthly Income
Monthly Credit Card Payment
Monthly Car Payment
Monthly Student Loan Payment
Other Monthly Debt Payments
Estimated Mortgage Payment
Total Monthly Debt Payments
How to Use the MoneyGeek Debt-to-Income Calculator
Your debt-to-income ratio tells lenders how much of your income goes toward paying debts. Lenders want to know that you'll be able to make your mortgage payments on time, and research finds that people with high DTIs are more likely to have trouble making those payments. Find out your DTI by entering the following values into the calculator.
|Input||What To Input|
|Gross Monthly Income||Your earnings before taxes and other deductions (401K, health insurance, etc.). This also includes commissions or returns from investments. Take your total earnings for the year and divide by 12 to arrive at your average monthly income.|
|Monthly Credit Card Payment||The total amount you are required to pay each month toward credit cards. Include only the required minimum payments here, even though you may be paying more each month.|
|Monthly Car Payment||The total amount of minimum payments you're required to pay each month toward auto loans.|
|Monthly Student Loan Payment||The minimum monthly payment required on your student loan.|
|Other Monthly Debt Payments||This is a total of your required minimum monthly payments on other debts. It may include personal loans, payments toward medical costs, alimony or child support, subscriptions, etc.|
|Estimated Mortgage Payment||Use your current or estimated monthly mortgage payment here, including escrow deposits, insurance and homeowners' association fees.|
|Output||What the Output Means|
|Your back-end DTI||A debt-to-income ratio, this is the percentage of mortgage and other fixed-payment debts you pay relative to your income. This broad figure provides a full picture of your ability to take on more debt.|
|Your Front-end DTI||Your mortgage-to-income ratio. The front-end DTI is your projected monthly mortgage payment — including principal, interest and taxes — divided by your monthly gross income.|
|Total Monthly Debt Payments||The total amount of monthly payments you make toward revolving and installment debts.|
Lender Standards for Debt-to-Income Ratios (DTI)
Lenders want to know how well you're making ends meet and how much home you can actually afford. The lower your DTI, the less debt you owe and the more able you are to make monthly loan payments.
Lenders consider both your front-end ratio, which is the percentage of mortgage you pay relative to your income, and your back-end ratio, which measures your total debts, including mortgage expenses, against your income.
|Mortgage Industry Term||How it's calculated||Conventional lender typical maximum ratio||FHA Term||FHA Maximum ratio|
|Front-end ratio||Mortgage expense divided by gross monthly income||.28||Total Mortgage Expense Debt-to-Income Ratio||.31|
|Back-end ratio||All debt obligations divided by gross monthly income||.36||Total Fixed Payment Expense Debt-to-Income Ratio||.43|
Front-End and Back-End Debt-to-Income Thresholds
Conventional or conforming lenders are usually looking for a maximum front-end ratio of 28 and a back-end ratio of 36, usually expressed as "the 28/36 rule." These thresholds are usually higher on FHA loans.
When you're shopping for a home loan, you should know that the FHA and conventional lenders may express these ideas in slightly different terms:
Total Mortgage Expense Debt-to-Income Ratio
Lenders usually prefer that your mortgage payment not be more than 28 percent of your gross monthly income. This is known in the mortgage industry as the front-end ratio.
To determine your mortgage expenses, lenders include the following in their calculations:
- Principal and interest
- Escrow deposits for taxes
- Hazard and mortgage insurance premiums
- Homeowner's dues, if applicable
These costs are totaled and then divided by your monthly gross income for figure that should come to no more than .28, or 28 percent — for FHA loans, this number may be slightly higher.
Your lender will total these mortgage-related costs and divide them into your monthly gross income. The debt-to-income mortgage expense ratio should be 31 percent or lower.
Total Fixed Payment Expense Debt-to-Income Ratio
To get a clear picture of your ability to make payments on a home loan, lenders evaluate both your mortgage payments and the amounts you owe on all other debts as well, to arrive at what's known as your back-end debt ratio. Both revolving and installment debts are considered.
These debt amounts vary from month to month. They are open-ended, with variable interest rates and payments that are tied to balance amounts. They include:
- Credit cards (Visa, MasterCard, American Express, etc.)
- Store charge cards (Macy's, The Gap, and so on)
- Personal lines of credit
To determine your average monthly payments on revolving debts, your lender will generally ask you to submit several months' worth of statements.
These are one-time debts have fixed terms and equal monthly payment amounts that apply toward principal and interest. Once the balance is paid off, the account is closed. They include:
- Auto payments
- Student loans
- Some personal loans
- Large purchases, such as vehicles or furniture
To calculate your installment debts, your lender will ask to see a statements for each debt that shows your total balance and monthly payment.
Once your monthly revolving and installment debt amounts are totaled, they are added to your mortgage expenses and other recurring monthly payments and divided by your pre-tax income. That final percentage should be no more than .36, or 36 percent for conventional loans, or slightly higher for FHA loans.
However, lenders are free to set their own ratios, and they may also exercise discretion based on certain factors, including a high credit score or a large down payment amount. On the other hand, if you have a back-end ratio that's higher than 43 and a credit score below 620, you can expect additional scrutiny from lenders before they'll consider extending you a loan.
Debt in an FHA DTI Calculation
When you apply for a loan, you'll need to disclose all debts and open lines of credit — even those with without current balances. In a lender's mind, a zero-balance open line of credit is a risk, because you're only one shopping spree away from being in more debt.
Make sure that your DTI calculations include all student loans, all credit card payments (use minimum payment amounts) and auto loans. Your auto and estimated mortgage payments should include amounts for monthly auto and homeowner insurance premiums. You also will need to include any loans you've received from family or friends, medical payments, alimony or child support and other regular monthly amounts owed.
Let's use the following example to calculate a back-end debt ratio:Calculate a Debt-to-Income Ratio
|Credit card payment||$200|
|Student loan payment||$220|
|Estimated mortgage payment*||$1,000|
|Other debt payments||$100|
|Total monthly debt payments||$2,020|
|Gross monthly income||$6,000|
|Back-End Debt-to-Income Ratio||33%|
* Including mortgage and payment to escrow, including property taxes, HOA fees, and insurance.
FHA-Specific DTI Standards and Calculations
Conventional mortgages are great for borrowers who have good credit because of their conservative terms — with a high credit score, a minimum down payment and a low DTI, a borrower can qualify for a conventional loan without too much hassle. However, if your credit is less than stellar, your debt is somewhat high or you can't afford a minimum (or any) down payment, an FHA loan is a great option.
FHA loans are normally priced lower and have more flexible standards than conventional loans because they are insured by the federal government. Borrowers with credit scores below 600 and high debt-to-income ratios may still be able to receive FHA loans. Unlike the "28/36 rule" applied by conventional or conforming lenders, the maximum DTI set by the FHA is 31/43, though some lenders may opt to set lower thresholds.
Expect, however, that applying for an FHA loan will require you to jump through a few more hoops than a conventional loan — namely, more paperwork and the potential for extra processing time.