by Broderick Perkins
(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.
Try Erate's "How Much Do I Qualify For?" calculator
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.
Government lenders and special programs may allow higher debt-to-income ratios under some circumstances.
All other qualifying factors aside, the lower your ratios, the better chance you have getting a loan at the best rate.
Obviously, you can improve your ratios by lowering your debt or increasing your income.
In the chart below, the text above the pie charts should be reversed, otherwise it's handy way to calculate your ratios.
Other related articles:
Investors refinance, lock down risk with low mortgage rates
Contrarian mortgage shoppers shop around, but not always for mortgages
Why FRMs are strong and ARMs are weak
Forecasts call for window to close on record-low interest rates for refinancing
New FHA Rule May Reduce Borrowing, Hurt Housing Market
Healthy mortgages far outweigh distressed home loans