Calculating Debt to Income Ratio
Your debt-to-income ratio or DTI is the resulting percentage of dividing your monthly liabilities by your monthly income. Lenders use this number to qualify you for a specific mortgage loan amount. Most mortgages now have a maximum back-end DTI ratio of 43% as a result of the new Qualified Mortgage rule. A back-end DTI percentage encompasses all your monthly liabilities versus your income, and a front-end DTI percentage represents your monthly housing payment versus your income. Lenders weigh your back-end DTI ratio more importantly than your front-end DTI ratio, but both numbers are very important.
Your DTI ratio maximum will also depend on the type of loan you take out. FHA loans are dependent on whether or not your loan is automatically or manually underwritten. Manually written loans have a maximum DTI ratio of 31/43. If your purchase qualifies as an FHA Energy Efficient Home, you have a maximum DTI ratio of 33/45.
VA loans have the same automatic and manual qualifications as do FHA loans. If your VA loan is manually underwritten, your back-end DTI ratio is 41%. VA loans do not have any front-end DTI requirements. You can sometimes exceed this number if you have other factors such as a residual income that is 120% of your area’s limit. USDA loans have a maximum debt-to-income ratio of 29/41. These rates can be exceeded if your loan is approved under the Guaranteed Underwriting System.
If you’re curious about your debt-to-income ratio, divide your gross annual income by twelve. Then, divide that number by all of your monthly responsibilities, and that’s your number. This number is a great way to estimate how much house you can afford. Your lender will also work with you to make sure you purchase a house within your comfort zone so as to reduce your chances of defaulting.