Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out. This financial calculation is just one of the ways lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.
To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. For example, if you pay $1700 a month for your mortgage and another $200 a month for an auto loan and $350 a month for the rest of your debts, your monthly debt payments are $2,250. ($1700 + $200 + $350 = $2,250.) If your gross monthly income is $6250, then your debt-to-income ratio is 36%. ($2250 is 36% of $6250.)
When it comes to mortgage loans there are 2 debt ratios that are considered:
Your front-end ratio calculates the amount of gross income that goes towards housing costs. For a homeowner, the front-end ratio can be calculated by adding up all housing expenses such as mortgage payments, taxes, HOA fees, mortgage insurance premiums and home owners insurance then dividing it by the homeowner’s gross income.
For example, a consumer with a monthly gross income of $6,000, who owes $2,000 in monthly mortgage payments, would have a front-end DTI ratio of 33%.
Your back-end ratio calculates the amount of gross income that goes towards paying all monthly debt payments, including housing costs, credit card payments, car loans, student loans, and any other debts.
For example, a consumer with a monthly gross income of $12,000, who has $3,500 in monthly liabilities (a $2,000 monthly mortgage payment and $1,500 in credit card and monthly auto loan payments), would have a back-end DTI ratio of 29%.
Some lenders can lend on higher debt ratios with compensating factors.
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