Debt-to-income ratio is the calculation that measures monthly debt payments against gross monthly income.

Lenders use DTI ratios to determine the likelihood of a borrower repaying their mortgage loan. A lower DTI ratio is generally better for getting approved for a mortgage.

(Total monthly debt) / (Gross monthly income) x 100 = DTI

Lenders use this simple equation to determine your DTI ratio. A lower DTI ratio means you’re less risky to lenders.

When calculating your debt-to-income ratio for a mortgage, include all of your monthly debt payments, including:

Mortgage: Your monthly mortgage payment, including principal, interest, taxes, and insurance (PITI)

• Consumer debt: Credit card balances, personal loans, and store credit accounts
• Auto loans: Monthly payments on new and used vehicles
• Student loans: Both private and federal student loans
• Other installment loans: Personal or installment loans for home improvements or debt consolidation
• Child support: If you have more than 10 monthly child support payments remaining

Follow these three steps to calculate your DTI ratio:

1. Add up all your monthly debt payments
2. Divide the total by your gross monthly income
3. Multiply the result by 100 to express your DTI as a percentage

What’s not included:

• Expenses like groceries, utilities, gas, and your taxes
• Health insurance, auto insurance, cell phone, cable
• Non-recurring life expenses

The main difference between the two is what types of expenses are included.

Front-end DTI ratio:

• Is also known as the ‘housing ratio’ or ‘mortgage-to-income ratio’
• It calculates the percentage of a person’s income that goes toward housing expenses
• Includes mortgage payments, property taxes, homeowners insurance, and homeowners association fees
• Lenders typically prefer a front-end ratio of no more than 28%

Back-end DTI ratio:

• Calculates the percentage of a person’s income that goes toward all debt payments
• Includes housing expenses, credit card payments, auto loans, student loans, child support, and personal loans
• Back-end ratios are typically higher than front-end ratios because they include more debt obligations

Lenders often give the back-end ratio more weight than the front-end ratio. A favorable back-end DTI ratio would be 36% or lower.

Qualified Mortgages

A Qualified Mortgage has less risky features that lower risk for the lender. These include a maximum debt-to-income ratio (the percentage of your income that goes toward monthly debt payments). Most conventional loan underwriting conditions limit DTI to 45%, but some QM lenders will accept ratios up to 50% if the borrower has compensating factors, such as reserves allocated for housing expenses.

For manually underwritten loans, Fannie Mae’s standard maximum total DTI ratio is 36% of the borrower’s stable monthly income. The maximum can be exceeded up to 45% if the borrower meets the credit score and reserve requirements reflected in the Eligibility Matrix. For loan casefiles underwritten through Fannie Mae’s Desktop Underwriter®, the maximum allowable DTI ratio is 50%.

While the CFPB says the debt-to-income ratio cap is typically the highest ratio a borrower can have and still get a Qualified Mortgage,  there are some exceptions:

• A small creditor still has to consider your ratio, but is allowed to offer a Qualified Mortgage with a ratio higher than the cap. In most cases, a lender is a ‘small creditor’ if it had under $2 billion in assets in the last year and generated no 500 mortgages or less during the previous year;
• Larger lenders may still make a mortgage loan if your debt to income ratio is above the cap, even if this prevents it from being a Qualified Mortgage. But they will have to make a reasonable, good-faith effort, following the CFPB’s rules, to determine that you have the ability to repay the loan.

Non-Qualified Mortgage Loans

Some Non-Qualified Mortgage loans permit ratios over 50%, but may require higher down payment minimums of 10% to 20%.

Other options for higher DTI ratio borrowers include FHA mortgages, VA mortgages, CDFI Mortgages and Asset based Mortgages.