What is a ‘debt to income ratio’?

A debt to income ratio or DTI is a guideline used by lenders to determine the maximum mortgage amount a Georgia home borrower qualifies to borrow.

The debt to income ratio is usually expressed by two numbers.  The first, called the front-end ratio indicates the percentage of the borrower’s income that goes toward home mortgage expenses.  This number is calculated by dividing the total of the borrower’s proposed monthly mortgage payment (including principal, interest, taxes, insurance, and, when applicable, mortgage insurance premium and homeowners’ association dues) by the borrower’s gross monthly income, which is income before taxes.

The second number, called the back end ratio, indicates the percentage of the borrower’s income that goes toward paying all recurring debt payments, including credit card payments, auto loan payments, student loan payments, alimony or child support payments, etc, as well as the monthly home mortgage expenses.

For example, assume that a Georgia borrower with a gross monthly income of $4,500 has a proposed monthly mortgage payment of $950 per month.  This $950 payment includes principal, interest, taxes, insurance, mortgage insurance premium, and homeowners’ association fee.  In addition, this borrower has a monthly auto loan payment of $300, as well as monthly minimum credit card payments of $200, for a monthly total of $500 in additional monthly expenses.

A lender determines this borrower’s front end ratio by dividing the proposed $950 monthly mortgage payment by his monthly gross income of $4,500, which equals 21%.

A lender determines this borrower’s back end ratio by adding the proposed $950 monthly mortgage payment to the total of his additional monthly expenses of $500, for a total monthly outlay of $1,450.  Dividing this number by the borrower’s gross monthly income of $4,500 gives the borrower a back end ratio of 32%.

In this example, the borrower’s DTI ratio would be expressed as 21/32.

A common DTI ratio guideline that lenders use when approving home mortgages is 33/38, meaning that a borrower’s home mortgage payment should consume no more than 33% of his gross monthly income, and his total expenses should consume no more that 38% of his gross monthly income.    

However, this is simply a general guideline, and it does not mean that a borrower will not be approved if his DTI exceeds these numbers.

Georgia Residential Mortgage Licensee #7359

National Mortgage Licensing System & Registry (NMLS) #133589