We have done a lot of math throughout this course let’s do a quick review of debt to income mortgage loan program guidelines include debt to income calculations, a loan program, and the Truth-in-Lending Act or TILA – have maximum DTI ratios allowed for the loan program and mortgage rules.
When determining a loan program for which the borrower qualifies one of the first steps is to determine if the borrower has sufficient income to support the DTI requirements for the loan amount requested. If the loan program has only one DTI requirement the ratio expected is the back end ratio or total debt ratio
The Front-end Ratio
The front-end ratio is calculated by taking the total housing expense, PITI – Principal Interest Taxes and Insurance and dividing it by the gross income of the borrower. The answer is a percentage with two decimal places.
PITI ÷ Gross Income of the borrower = % with two decimal places
Note: most automated underwriting systems only use the back end ratio or total debt ratio and not the front-end debt ratio.
Example:
A borrower’s monthly qualifying income is three thousand dollars.
The proposed loan PITI payment is nine hundred dollars.
What is the borrower’s front-end DTI?
Let’s take the $900 and divide it by $3,000 and we get 0.30 times that by 100 and we get a 30.00% housing expense ratio or front-end debt ratio.
The Back-end ratio
The back end is calculated by taking the total amount of monthly debts that the borrower has including the housing expense and dividing it by the gross income of the borrower this is sometimes called the total debt ratio only monthly debts from the credit report and obligations
such as alimony and child support are included in this ratio no utilities cell phone or other living
expenses are included.
Example:
A borrower’s monthly qualifying income is three thousand dollars
The current proposed loan PITI is nine hundred dollars.
They have a car payment of three hundred dollars.
A credit card payment of forty-five dollars.
Lastly, a cell phone bill of One hundred dollars
What is the borrower’s back-end DTI?
Remember: their back-end DTI will include the car payment, the mortgage payment, and credit card payment but will not include the cell phone bill.
Step 1:
Add all monthly debts: $900 PITI payment + the $300 car payment + the $45 credit card Payment = $1245 total obligations after the loan closes.
Step 2:
Let’s take the total obligations and divide them by the gross income of the borrower: $1245÷$3000 gross income of the borrower = 42 x 100 = 42% DTI.
That’s it. Funding Force blogs is always here to provide you with some substantial knowledge in the Financial world.
