DTI Ratio First Time Homebuyer Dream Thief

A good credit score is not enough to be mortgage-ready
Yes, you need a good credit score. Just as important is your debt-to -income ratio. Your debt to income ratio tells a lender how close you are living to the edge. It is known as DTI.
DTI measures the percentage of your gross monthly income is used to service certain debt types. The minimum monthly payment you are obligated to make compared to your verifiable gross monthly income.

• Credit cards monthly minimum payments
• Installment loans
• Child Support
• Student loans Monthly payment calculated as equal to 1% of outstanding balance not actual payment
• All other debts that show on your credit report that require monthly payments
• Plus your mortgage payments and other housing expense

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There are 2 types of DTI

• The front-end debt-to-income ratio looks at the monthly house payment compared to monthly income
• The back-end debt-to-income ratio looks at all monthly debt payments compared to monthly income

Front End or Housing Ratio
The front-end ratio, also called the housing ratio, shows what percentage of your income would go toward your housing expenses. housing ratio front-end ratio includes

• Monthly mortgage payment (principal + interest)
• Real estate taxes
• Homeowner's insurance
• Association dues

To calculate the front-end ratio, add up your expected housing expenses. Then divide it by how much you earn each month before taxes (your gross monthly income.) Multiply the result by 100, and that is your front-end DTI ratio. 

Front End DTI Calculation example

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Back End Ratio​
The back-end ratio shows what percentage of your income would go toward debt service. It includes

• Credit cards monthly minimum payments
• Installment loans
• Child Support
• Student loans Monthly payment calculated as equal to 1% of the outstanding balance, not the actual payment
• All other debts that show on your credit report that require monthly payments
• Plus your mortgage payments and other housing expenses

Back-end DTI calculation example

Conventional Loans
Lenders typically say the ideal front-end ratio should be no more than 28%. The back ratio, including all expenses, should be 36% or lower. In reality, depending on credit score, savings, and down payment, lenders accept higher ratios. Limits vary depending on the type of loan. For conventional loans, most lenders focus on your back-end ratio.

FHA Loans
The recommended debt-to-income limit is 31% on the front ratio and 43% for the back ratio. But with certain compensating factors, the FHA automated approval system accepts ratios as high as 46.99% for housing expenses and 56.99% for the total back ratio.

Downpayment assistance grants and other first time home buyer programs usually overlay additional DTI underwriting guidelines on a mortgage application. The overlays are not necessarily more restrictive. Some may loosen DTI limits.

You should consult with a knowledgeable, experienced loan officer (LO) in first-time homebuyer programs for specific options. This person and your research will be your best resources in finding programs. Be woke to the fact that many of the grants and other applications can be geo-specific even down to the zip code

Other DTI Ratio Need to Know
DTI is calculated on GROSS Monthly Income. You live out of NET Monthly Income. This is mainly a consideration when the LO tells you how much home you qualify based on your DTI. You should decide how much of a monthly payment you can afford before you begin the mortgage application process.