Debt-to-income ratio (DTI) is the share of your pre-tax monthly pay that goes to the new house payment plus your other monthly debts. Each loan program sets a ceiling on that percentage, and FHA's is the highest at 56.9% with an automated approval.
How the math works
DTI equals the new house payment plus your monthly debt payments, divided by gross monthly income.
The house payment is principal, interest, property taxes and homeowners insurance (PITI), plus mortgage insurance and any HOA dues. The debts are the monthly payments on your credit report, such as car loans, card minimums, student loans and personal loans, plus any child support or alimony you pay. Gross monthly income is pay before taxes and deductions come out.
Lenders figure two versions. The front-end ratio uses the house payment alone. The back-end ratio adds every other debt, and it's the number most loan officers mean when they say "DTI."
Kendra's numbers on a $310,000 FHA purchase
Kendra earns $5,400 a month before taxes. She's buying a $310,000 single-family home with FHA's 3.5% down payment ($10,850), so her base loan is $299,150. FHA adds the 1.75% upfront mortgage insurance premium ($5,235.13) to the loan, for a total of $304,385.13.
| Item | Monthly |
|---|---|
| Principal and interest at a 5.75% rate | $1,776.31 |
| Annual MIP at 0.55% | $137.11 |
| Property taxes at 0.95% a year | $245.42 |
| Homeowners insurance | $260.00 |
| House payment | $2,418.84 |
| Car loan | $385.00 |
| Credit card minimum | $45.00 |
| Student loans ($18,000 balance, $0 payment, counted at 0.5%) | $90.00 |
| House payment plus debts | $2,938.84 |
Her front-end ratio is $2,418.84 divided by $5,400, or 44.8%. Her back-end ratio is $2,938.84 divided by $5,400, or 54.4%. FHA's automated limits of 46.9% and 56.9% come to $2,532.60 and $3,072.60 on her income, so Kendra qualifies with about $134 a month to spare on the total.
The ceilings by program
| Program | Housing limit | Total limit |
|---|---|---|
| FHA, automated approval | 46.9% | 56.9% |
| FHA, manual underwriting | 31%, up to 40% with compensating factors | 43%, up to 50% |
| Conventional, automated approval | No separate limit | 50% |
| VA | No separate limit | 41% guideline, residual income decides |
| USDA | 29% | 41% |
FHA leaves the most room for debts, which is a big reason it carries so many first-time Florida buyers. VA can approve above 41% when the buyer's residual income runs at least 20% above VA's table, and compensating factors such as savings left after closing raise the FHA manual limits.
Bringing a high DTI down
Both halves of the fraction can move. On the debt side, paying one account to a $0 balance removes its whole minimum payment, while paying it down halfway barely changes the minimum. On the income side, a co-signer adds their income (and their debts) to yours, and untaxed income such as SSI or child support can be grossed up 15% on FHA and 25% on Conventional. A slightly lower price, or a seller credit used to buy down the rate, shrinks the house payment itself.
Put your own income and debts into the DTI calculator and it shows both ratios on every program at once. If your total lands close to a limit, call AAA Capital Funding at 888-601-8344 and we'll find the payoff or co-signer that clears it.