Calculating Your Debt-to-Income Ratios

By: Joanna Melton

In addition to your credit score, your debt-to-income (DTI) ratios are looked at by closely by mortgage lenders when you apply for a loan. This ratio is extremely important in determining the risk associated with approval.

This article will help you calculate your own DTI. This will be useful to you not only by determining your odds of being approved for a new loan but to discover if applying for a new loan is the best idea for your budget.

There are 2 parts to your debt to income ratio that mortgage lenders will calculate: the front end ratio and the back end ratio.

The front end ratio is often called the housing ratio. This calculation shows what percentage of your gross monthly income will go towards housing expenses. This includes mortgage payments, property taxes, homeowners insurance and any HOA dues.

To calculate the front-end ratio, follow the steps below.

1. Add your total expected housing expenses. This includes the principle and interest mortgage payment, taxes, insurance and any HOA dues.
2. Divide your housing expenses by your gross monthly income.
3. Multiply that number by 100. The total is your front-end DTI ratio.

For example: 

• Monthly mortgage payment $1,500 which includes the taxes and insurance escrowed + HOA dues $35 = $1,535
• $1,535 divided by gross monthly income of $6,000 = .2558
• .2558 times 100 = 25.58%. Ideally this number should be below 28%.

The back end ratio compares what portion of your income is needed to cover all of your monthly debts. These debts include housing expenses in addition to loans, credit cards and other monthly credit obligations.

Use the steps below to calculate your own back end debt-to-income ratio.

1. Add up your total monthly bills. Make sure to include monthly rent or mortgage payments, loan payments, credit card minimum due payments, any child support/alimony payments.  Expenses such as utilities are not included.
2. Divide the total from step 1 by your gross monthly income, which is your income before taxes.
3. Multiply the total from step 2 by 100

The total is your back end DTI ratio. The lower the DTI the better your odds are for being approved for new credit. 

For example:

• Monthly debt equals $3,500 divided by gross monthly income of $8,000 = .4375
• .4375 x 100 = 43.75%
• This DTI ratio is about 44%. Ideally, this ratio should be below 45%

Have questions about calculating debt-to-income ratios? Extraco Mortgage is here to help. Learn more and get in touch here.