Debt-to-Income Ratio Explained Simply

When you apply for a mortgage, your lender will calculate your debt-to-income ratio, often called DTI. It is one of the most important numbers in your application, and one of the least understood. Here is what it means and how to improve yours.

What Is DTI?

Your debt-to-income ratio is exactly what it sounds like: your monthly debt payments divided by your gross monthly income, expressed as a percentage. It measures how much of your income is already committed to debt payments and tells lenders how much room you have to take on a mortgage.

Front-End vs. Back-End DTI

Lenders typically look at two versions of DTI:

• Front-end DTI (housing ratio): Your proposed monthly housing payment, including principal, interest, taxes, insurance, and HOA fees, divided by your gross monthly income. Most lenders want this below 28-31%.
• Back-end DTI (total debt ratio): All of your monthly debt payments, housing plus car loans, student loans, credit cards, personal loans, divided by gross monthly income. Most conventional lenders want this below 43-45%. FHA allows up to 57% in some cases.

What Counts as Debt in DTI?

Monthly debt payments that factor into DTI typically include:

• Car loans and leases
• Student loans (even if in deferment, lenders often use 1% of the balance)
• Credit card minimum payments
• Personal loans
• Child support and alimony paid
• Other mortgage payments

Utilities, phone bills, subscriptions, and insurance are not included in DTI calculations.

How to Improve Your DTI

There are two levers: increase income or decrease debt. In practice:

• Pay down high-balance installment loans or credit cards before applying
• Avoid taking on new debt in the months before your mortgage application
• If you have income from a side job or freelance work, document it consistently, lenders may be able to count it after a two-year history
• Consider whether a co-borrower's income could help, a spouse or partner on the application adds their income to the calculation

Does DPA Affect DTI?

Dream Home Fund's DPA is structured as a silent second with no monthly payment. Because there is no monthly payment, the silent second does not directly add to your back-end DTI calculation. Your lender will be aware of the silent second as part of your overall loan structure, but the absence of a monthly payment is one of the features that makes this DPA structure favorable for borrowers.