What Is the Front-End Debt-to-Income (DTI) Ratio?
Your front-end debt-to-income ratio (DTI) represents the percentage of your monthly gross income that goes to paying your total monthly housing expenses. The front-end debt-to-income (DTI) ratio helps mortgage lenders determine the affordability of borrowers looking to buy a home.
Your total monthly housing expenses include the mortgage payment, property taxes, mortgage insurance, and homeowners insurance. To calculate your front-end debt-to-income (DTI) ratio, total the expected monthly housing costs and divide it by your monthly gross income.
The front-end DTI ratio can help determine how much you can afford to borrow when buying a home. However, mortgage lenders use other metrics in the loan approval process, including your credit score and debt-to-income ratio (DTI), which compares your income to all of your monthly debt and housing expenses.
Key Takeaways:
- The front-end debt-to-income (DTI) ratio represents the percentage of your monthly gross income that goes to your total housing expenses.
- Your total housing expenses include the mortgage payment, mortgage insurance, homeowners insurance, and property taxes.
- Calculate your front-end debt-to-income (DTI) ratio by dividing the total expected monthly housing costs by your monthly gross income.
- Your back-end DTI—or debt-to-income ratio—calculates the percentage of gross income spent on all debt, including housing, credit cards, and loans.
- Lenders usually prefer a front-end DTI of no more than 28% and a back-end DTI of 33% to 36%.
Front-End Debt-to-Income (DTI) Ratio Formula and Calculation
The front-end debt-to-income (DTI) ratio compares your total housing or mortgage expenses to your monthly gross income. The formula for calculating the front-end debt-to-income ratio is:
Front-EndDTI=(GrossMonthlyIncomeHousingExpenses)∗100
To calculate the front-end DTI, add up your expected housing expenses and divide it by how much you earn each month before taxes (your gross monthly income). Multiply the result by 100 to arrive at your front-end DTI ratio. For example, if all your housing-related expenses total $1,000 and your monthly income is $3,000, your front-end DTI is 33%.
The front-end DTI is also known as the mortgage-to-income ratio or housing expense ratio.
What Is a Good Front-End DTI Ratio?
Your front-end debt-to-incomeratio represents the percentage of your gross monthly income that goes to your total housing expenses. Lenders typically prefer a front-end debt-to-incomeratio of no more than 28% for borrowers looking to qualify for a mortgage.
In reality, mortgage lenders may accept higher ratios depending on your credit score, savings, down payment, and the type of mortgage loan.Payingyour bills on time, earning a stable income, andmaintaining a good credit score can also help you qualify fora mortgage loan.
Higher front-end DTIs can increase the likelihood of mortgage loan defaults. For example, in 2009, many homeowners had front-end DTIs significantly higher than average. Consequently, mortgage defaults increased. In 2009, the government introduced loan modification programs to get front-end DTIs below 31%.
Note
The maximum acceptable DTI for qualified mortgages is 43%.
Front-End DTI vs. Back-End DTI
The front-end DTI reflects the percentage of monthly gross income that comprises your expected monthly housing expenses. Conversely, the back-end debt-to-income ratio represents the percentage of your gross monthly income that goes to all debt payments. In other words, the back-end DTI includes your total housing expenses plus all other monthly debt payments, such as:
- Installment loans, such as auto or personal loans
- Revolving credit, such as credit cards or lines of credit
- Student loan payments
- Lease payments
- Alimony and child support
- Monthly payments for rental properties you own
The back-end DTI ratio calculates the percentage of gross income going towardall monthly debt types, such as credit cards, car loans, and monthly housing payments.
The back-end DTI ratio is commonly known as the debt-to-income ratio (DTI) since it includes all monthly debt obligations and housing payments. When a lender refers to your debt-to-income, they are usually referring to the back-end DTI, meaning all of your monthly debts versus your monthly income.
Typically, mortgage lenders prefer to see borrowers with a back-end DTI ratio of no more than 33% to 36%.
Important
The back-end debt-to-income ratio can help qualify borrowers for other loans beyond mortgages, including personal loans, auto loans, and private student loans.
Examples of Debt-to-income Ratios
Let's say that you're looking to buy a home, and you must calculate your front-end and back-end DTI ratios.
Front-end DTI
Your estimated total housing expenses for the new home's mortgage:
- Mortgage payment: $1,700
- Mortgage insurance: $100
- Homeowners insurance: $200
- Property taxes: $200
- Gross monthly income: $7,000
Your total housing expenses equals $2,200, which gets divided by $7,000 of gross monthly income to arrive at your front-end DTI.
- Front-end DTI: 31.4% ($2,200 ÷ $7,000)
Back-end DTI
Your back-end DTI includes your total housing expenses plus other monthly debt. Below is an example of calculating your back-end DTI:
- Credit card: $100
- Car loan payment: $300
- Total housing expenses: $2,200
- Gross monthly income: $7,000
Your non-housing monthly debt payments total $400. When added to your housing expenses of $2,200, you have a total of $2,600 in monthly debt and housing payments, which gets divided by $7,000 in gross monthly income to arrive at your back-end DTI.
- Back-end DTI: 37% ($400 + $2,200 ÷ $7,000)
In both calculations, we multiplied the decimals by 100 to create the percentages.
You have a 31.4% front-end ratio, which represents the percentage of your income that would go to housing expenses and a 37% back-end ratio when considering all debt payments.
Once you calculate your debt-to-income ratios, you can discuss with your mortgage lender their requirements. If they require lower ratios, you can look for ways to improve them and consider speaking with a financial professional for help.
How Lenders Use Front-End DTI Ratio
Lenders use front-end and back-end debt-to-income ratios to determine your ability to repay a home mortgage loan. A higher DTI can signal to mortgage lenders that you might be stretched thin financially, while a lower DTI suggests you have more monthly disposable income that isn't going to debt repayment.
Your debt-to-income ratio represents just one metric since lenders also consider your income, assets, and employment history to gauge your ability to repay a mortgage loan. Debt-to-income ratios can play a significant role in decision-making for mortgage loans and refinancing.
Tip
Paying off credit cards, student loans, or other debts can improve your back-end debt-to-income ratio and potentially increase the amount of home you can afford.
Special Considerations
When preparing for a mortgage application, paying off your high-interest debt can significantly improve your front-endDTI. However,paying off debt can be challenging since most potential homebuyers must save for the down payment and closing costs.
If you think you can afford the mortgage, but your DTI is over the limit, a cosigner might help. However, if you can't make the payments, your credit score and your cosigner's credit could suffer.
What Is Front-End Debt-to-Income Ratio?
The front-end debt-to-income ratio reflects the percentage of your gross monthly income that goes toward housing costs, including your mortgage payment, property taxes, homeowners insurance premiums, and homeowners association fees, if applicable.
What Is a Good Debt-to-Income Ratio to Buy a Home?
Generally, lenders look for a debt-to-income ratio between 28% and 36% when qualifying a borrower for a mortgage. However, some qualified mortgage loans allow a DTI of up to 43%.
How Can I Improve My Debt-to-Income Ratio for a Mortgage?
Ways to improve your debt-to-income ratio include paying down credit cards and personal loans, reducing housing costs, and increasing income. A lower DTI can increase the amount you can afford to borrow when buying a home.
The Bottom Line
Your front-end debt-to-income (DTI) ratio represents your monthly housing expenses versus your gross monthly income. The front-end DTI metric helps mortgage lenders determine whether you can afford to buy a home via a mortgage loan. Your debt-to-income ratio (DTI) includes all of your housing expenses and other monthly debts. Knowing how much of your monthly income goes to paying down debt can help you improve your credit score and get approved for loans.
