Whenever someone applies for a real estate loan in order to purchase or refinance a home, the lender will calculate the applicant's debt to income ratios as part of the underwriting process. There are two separate ratios to be calculated. Both are important.

The Front-End DTI ratio only includes housing related expenses such as the expected monthly mortgage payment, homeowner insurance, real estate taxes, and any homeowner association fees.

The Back End DTI ratio includes everything included in the Front - End DTI ratio calculation plus all other debts such as vehicle loans, student loans, credit card payments, child support, alimony and any other installment loans.

The following expenses are not included in the Back End DTI ratio calculation: utilities, transportation costs, health insurance, food, clothing, and entertainment.

Both ratios are calculated using the gross monthly income of all applicants for the loan. The required debt ratios will depend on the type of loan for which the applicant is applying.

Most conventional lenders consider ideal ratios to be 28% and 36%, but most will accept a 43% back end ratio with good credit, and some lenders will accept a slightly higher back end ratio with exemplary credit and a strong loan to value ratio. VA and FHA lenders will often approve loans where the back end ratio is at 50%, but this assumes excellent credit.

Generally, there are three ways to improve your ratios: (1) pay off your smallest debts, (2) add another person to the loan, and (3) obtain a co-signer.

 

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