Front End DTI & Back End DTI
DTI is an acronym for Debt-to-Income Ratio and represents the ratio between a person’s monthly debt and his or her monthly income. Pretty simple, right? So how is it calculated and what does it have to do with mortgages?
There are two types of DTI, Front-end DTI and Back-end DTI. It’s important to note that, for the purpose of applying for a mortgage, these ratios are calculated based on your proposed monthly debt, not your current monthly debt. This means that the $2,000 a month you’re currently paying on your mortgage doesn’t make a bit of difference; all that matters is what you’ll be paying after you refinance.
Front-End DTI considers only your monthly housing-related expenses. Here’s the debt list:
Monthly Mortgage Payment(s)
All monthly mortgage payments; if you have payment options each month, the payment you should use is usually the minimum payment no less than interest-only, however, some lenders have different requirements, so ask your broker or leave a comment to this post if you have any questions.
Monthly Property Taxes
Monthly Home Owner Insurance Payment
Monthly Home Owner’s Association Dues
To figure Front-End DTI, add up all of the items above and divide by your monthly gross income.
Each lender may have slightly different Front-End DTI limits, but a reasonable number would be around 30% or so; meaning 30% of your monthly, before-tax income is going toward housing-related debts. Usually most lenders only use this figure for FHA loans and not so much for other loan types
Back-End DTI takes into account all of your monthly debt payments on your credit report + your Front end DTI , But don’t worry about the $50 a month you contribute to your local tee-ball club, it won’t be counted. You may need a copy of your credit report to figure this one out, especially since that’s what the lender will use when qualifying you for a loan. Here’s the Back-End DTI list:
Everything on the Front-End DTI list plus,
All minimum monthly payments showing on your credit report
Remember, DTI takes into account what your monthly debt will be after you get a loan, not what it is now, so if you’re refinancing to pay off debt, don’t include the debts that you’ll be paying off
To figure Back-End DTI, add up the items on this list and divide by your monthly gross income.
Each lender has slightly different requirements for Back-End DTI limits; the max is usually around 45%, but some lenders will require 40% or below, and some will allow up to 50%.
This all seems pretty simple, but most of the time it’s not quite as easy as this. First of all, each lender has different DTI requirements. Also, if your income has recently changed or you receive income from various sources this calculation may be quite a bit more complicated. If you have trouble qualifying for a loan, instead of full-documentation, you may be able to use SIVA (Stated Income, Varified Assets), SISA (Stated Income, Stated Assets), NINA (No Income, No Asset Disclosure), or No Doc (No income or asset confirmation of any kind). The important thing is that your mortgage broker know the requirements at the lenders he does business with, otherwise, you may find yourself out of luck when he submits your loan with Full Documentation to a lender whose Full-Doc requirements you don’t meet. Once he submits it with full-documentation, he can’t resubmit it under anything else if it gets turned down; if that happens, he’ll have to submit your loan to another lender. If you can qualify at the other lender, you’ve still lost valuable time and may see a rate increase. That’s why it’s important your mortgage broker know what he’s doing. So call us for an up to date program detail 877-410-6663