What Is Debt To Income Ratio?

Debt To Income Ratio

Debt To Income Ratio is the sum of the minimum month debt payments a loan applicant has divided by the loan applicant’s monthly gross income. Mortgage lenders consider debt to income ratios one of the most important factors when qualifying for a mortgage loan. There are different debt to income ratio requirement depending on the mortgage loan program. For example, the maximum debt to income ratio permitted for FHA Loans is 56.9% if the mortgage loan applicant credit scores of at least 620 FICO or higher. If the mortgage loan borrower has credit scores of under 620 FICO credit scores, then the maximum debt to income ratios allowed is 43% debt to income ratio. For conventional loans, the maximum debt to income ratios allowed is 45% DTI. For jumbo loans, the maximum debt to income ratios allowed is normally 40% DTI.

What Is Front End Debt To Income Ratio?

The front end debt to income ratio is the monthly principal, interest, taxes, and insurance payments divided by the mortgage loan borrower’s gross monthly income. The front end debt to income ratios is also called the housing ratio because mortgage lenders consider the housing ratio or proposed housing ratios very important to see whether or not the mortgage loan borrower can afford the new proposed mortgage payment. FHA Loans has a front end debt to income ratio cap of 46.9% DTI for FHA mortgage loan borrowers with credit scores of 620 FICO or higher. For FHA mortgage loan borrowers with credit scores of under 620 FICO credit scores, the front end debt to income ratios gets reduced to 31% DTI.

What Is The Back End Debt To Income Ratio?

The back end debt to income ratio is the front end debt to income ratio plus all other minimum monthly debt obligations such as minimum credit card payments, auto loan payments, student loans, installment loans, and any other monthly debts such as child support payments, alimony payments, payment agreements divided by the mortgage loan borrower’s gross monthly income.

Solution To High Debt To Income Ratio Borrowers

Mortgage loan borrowers with high debt to income ratios often need to go with FHA Loans. FHA Loans are much more lenient with high debt to income ratios than conventional loans. Maximum debt to income ratios for conventional loan programs is capped at 45% where FHA Loans have debt to income ratio caps at 56.9%. FHA Loans also allow for non-occupant co-borrowers for FHA mortgage loan borrowers with high debt to income ratios. More than one non-occupant co-borrowers are permitted with FHA Loans. With conventional loans, Fannie Mae does not allow non-occupant co-borrowers, however, Freddie Mac does allow non-occupant co-borrowers. Again, both Fannie Mae and Freddie Mac have debt to income ratio caps of 45% DTI.