• # Debt-to-Income Ratio Needed for a Mortgage Loan

Reader Question: What is the highest debt-to-income ratio that most mortgage underwriters will consider?

Let me start with some basic definitions for those who aren't familiar with this subject. As you might have guessed, your debt-to-income ratio (or DTI) is a comparison between the amount of debt you have and your gross income. It is typically expressed as a percentage.

For example, if your gross income is \$200,000 per year, and you pay \$25,000 per year toward your debt, then your debt-to-income ratio is just over 12 percent. That's the percentage of your gross income that goes toward your debt each year ... more or less. It's easier to calculate at the monthly level, and it works just as well.

A mortgage underwriter is the person who reviews the applicant's financial situation to give an approval or disapproval for the loan. In other words, the underwriter determines the level of risk involved with making a loan to a person, based on that person's credit score, financial history, debt-to-income ratio and other factors.

With those definitions out of the way, let's address the question at hand. What kind of debt-to-income ratio do you need to get a mortgage loan?

## Two Types of Ratios

There are actually two ratios you need to be concerned with. The lender will use both of them when considering you for a loan (though one carries more weight than the other).

• Your front-end ratio includes all of your housing-related debts. For a home buyer, this would be your monthly mortgage payment (including principal, interest, taxes and insurance). It is the percentage of your income that goes toward your housing costs. Lenders prefer this ratio to be below 29 percent.
• Your back-end ratio includes your housing debt plus all of your other recurring debts. This will include your credit card payments, student loans, auto loans and the like. If it shows up on your credit report, it will be counted toward your back-end debt ratio. Lenders prefer this number to be below 41 percent. This means your total debt (including housing costs) should not exceed 41 percent of your gross monthly income.

Note that we are using gross income to calculate these ratios. This is your full income before taxes are taken out. If you use your net monthly income (or take-home pay), your ratios won't be accurate.

Also note that these numbers are not set in stone. Some mortgage lenders will allow higher debt ratios. Additionally, certain types of loans have higher allowances. For example, you could probably get approved for an FHA loan with higher debt ratios than those allowed for a conventional mortgage. But these numbers are useful in that they give you a general idea where you stand.

Lenders are most concerned with the back-end ratio. This is the ratio that considers your mortgage payment, in addition to all of your other debts.

If they run the numbers for a certain loan amount, and your back-end ratio ends up being 50 percent or higher, you might have trouble getting approved. They might ask you to pay off a credit card, or reduce your debt level in some other way.

## Other Mortgage Qualifications

Keep in mind that DTI ratios are only one qualification item. Mortgage approvals are based on many different criteria. And all of these criteria have gotten tighter since the housing crisis began in 2008.

In 2011, home buyers need higher credit scores and lower debt ratios. They must also document their income for the last couple of years, and show proof of employment. Down-payment requirements have become more strict, as well. For a conventional mortgage, you'll have to put down at least 5 percent of the loan amount -- and maybe as much as 10 percent.