(4/18/2012) Erate Exclusive - When you apply for a mortgage, your lender will want to know your two debt-to-income (DTI) ratios. They are as important as your credit score.
Your DTI tells the lender how well you are equipped to handle a mortgage payment along with all your other debts, including housing.
The first DTI - the front-end ratio - indicates the percentage of your gross income that goes toward housing costs. For renters that's the rent amount. For homeowners it's PITI - combined mortgage principal, interest, property taxes (including homeowner association dues) and insurance (including mortgage insurance, when applicable).
The second DTI - the back-end ratio - indicates the percentage of gross income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments.
The two DTIs together are expressed as a pair, for example 28/36 are the ratios lenders generally prefer.
It means no more than 28 percent of your income goes toward housing costs and no more than 36 percent of your income goes toward all debts, including housing.
Remember, because the ratios use gross income - pre-taxed dollars - the ratios are a liberal picture of your spending ability and your mortgage lender will take that into account, especially if you are just on the borderline of qualifying.
The information contained on this website is provided as a supplemental educational resource. Readers having legal or tax questions are urged to obtain advice from their professional legal or tax advisors. While the aforementioned information has been collected from a variety of sources deemed reliable, it is not guaranteed and should be independently verified.
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