Debt-to-Income Ratio (DTI): What It Is and How to Calculate It

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The “debt-to-income ratio” or “DTI ratio” as it’s known in the mortgage industry, is the way a bank or lender determines what you can afford in the way of a mortgage payment.

By dividing all of your monthly liabilities (including the proposed housing payment) by your gross monthly income, they come up with a percentage. This key figure is known as your DTI, and must fall under a certain number in order to qualify for a mortgage.

The maximum debt-to-income ratio will vary by mortgage lender, loan program, and investor, but the number generally ranges between 40-50%.

Update: Thanks to the new Qualified Mortgage rule, most mortgages have a maximum back-end DTI ratio of 43%. However, there is a temporary exemption for many loans, but a lot of lenders still want this number to be under 43%!

Let’s look at a basic example of the debt-to-income ratio:

  1. Annual gross income (as reported on your tax returns/W-2 form): $120,000
  2. Monthly gross income: $10,000
  3. Monthly liabilities: $3,500
  4. 35% debt-to-income ratio

In this example, your debt-to-income ratio would be 35% ($3,500/$10,000). Pretty simple, right?

Well, before you think you’re done calculating your DTI, you should know that the debt-to-income ratio goes into greater detail and comes up with two separate percentages.

One for all of your monthly liabilities divided by your gross monthly income (back-end DTI ratio), and one for just your proposed monthly housing expense (including taxes and insurance) divided by income (front-end DTI ratio).

Front-End and Back-End Debt-to-Income Ratios

  1. There are actually two DTI ratios
  2. One for the front-end (your proposed housing payment)
  3. And another for the back-end (that includes all monthly debts)
  4. Some lenders may require you to stay below both limits

In the example above, if your proposed monthly housing payment makes up $2,000 of your $3,500 in monthly liabilities, your front-end DTI ratio would be 20%, and your back-end DTI ratio would be 35%.

Some banks and lenders require both numbers to fall under a certain percentage, though the back-end DTI ratio is more important since it considers all your monthly debts, and is thus more representative of the risk you present to the lender.