Debt / Income Ratio

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The DTI - "Debt To Income" ratio - is a simple indicator of your possibilities to get a loan. It shows, how much of your income is spent for repaying specific kinds of debt.

Of course every financial institution has their own way of assessing the potential borrowers, but basic standards are used by most of the lenders. Especially if you are planning to buy a home, it is very useful to calculate your DTI in order to estimate whether it is possible to get a loan you need.

DTI ratio has 2 factors - "front" and "back" factor. The standard maximum DTI acceptable by lenders is 28/36, what means that the "front" factor should be maximum 28, and the "back" factor should be maximum 36.

The first factor is calculated as the percentage of your gross income (income before all taxes and other deductions), which is spent on housing expenses - payments on the mortgage loan principal and interest, private mortgage insurance, hazard insurance and property taxes. It means that the above monthly housing expenses should not exceed 28% of your gross monthly income.

The second factor is calculated as the percentage of your gross income, which is spent on housing expenses and recurring debt. So, this factor covers the first factor plus other expenses - including credit card payments, child support, auto loans, etc. All these monthly expenses should not exceed 36% of your monthly gross income.

To understand it in full, you can look at the following example.

Let's assume, that you have $5,000 of monthly gross income. You don't have any mortgage loan yet. You estimate that expenses on insurance and property taxes connected with the house you want to buy will not exceed $300 monthly.

$5,000 * 0,28 = $1,400 is the limit for maximum housing expenses.

$1,400 - $300 = $1,100 is the limit of your mortgage loan monthly payment.

Now, if you know the actual interest rate for mortgage loans and if you know how much you need to borrow, you can estimate if the credit is available for you. You can use our calculator to do it - for example let's assume, that the interest rate is 5%, and you need to borrow $200,000. If you put these factors into the calculator and you specify the desired monthly payment as $1,100, you get a payment period of 341 months, which means less that 29 years. So, you should be able to get a $200,000 loan for a payoff period of around 30 years.

However, you should remember that the requirement for the second factor should also be met.
$5,000 * 0,36 = $1,800
and
$1,800 - $1,400 = $400 is the limit for your monthly expenses for repaying recurring debt.

So, if your expenses for recurring debt repayment are exceeding $400, your maximum mortgage loan monthly payment decreases. For example, if you spend $550 for recurring debt monthly, you can qualify for a mortgage loan with maximum monthly payment of $950.


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