Homebuying 101: Debt-to-Income (DTI)

Your Debt-to-Income (DTI) ratio is your monthly debt obligations against your gross monthly income. Debt obligations include any kind of debt that reoccurs and is not likely to end soon. Some examples include credit card payments, auto loans, child support payments, other mortgages or student loans.

Gross monthly income includes a variety of categories. It is any monthly, recurring income you receive and is calculated pre-tax. This could be income from an employer, Social Security benefits, retirement savings or investment accounts.

Lenders will use two different types of DTI calculations while working up your loan. Front-end DTI is your proposed monthly housing payment divided by your gross monthly income. And back-end DTI is all of your monthly recurring debts plus the proposed housing payment, divided by your gross monthly income.

Although this may sound complicated, these numbers are important, which is why you’ll want to discuss with your lender what percentage you need to be at to qualify for financing. Also make sure to take into account all of your expenses that are not considered debt, but may constitute monthly payments such as groceries, gas or entertainment.

Want to know more about debt-to-income ratios, homebuying 101 or how to begin your journey home? Contact one of our home loan experts to get started today!


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