Just like web development, DTIs come in two forms: The front-end ratio and the back-end ratio. For this reason, you will sometimes see DTIs not as a single percentage, but as two numbers (for example: 28/36.) The top number represents the front-end ratio, and the bottom number is the back-end ratio.
Front-end ratios, also referred to as the housing ratio, only take into account debt incurred toward your new housing costs, while back-end ratios, sometimes referred to as the debt ratio, includes all current recurring debt payments, which can include a current mortgage if you already have one. In short: Property taxes, hazard insurance, and homeowner’s association fees for your new home are all are factored in to the calculation of your front-end ratio.
● Front-end DTIs (housing ratio): Loan payment for any liens on the property, property taxes or any type of tax tied to the new home, homeowners insurance, flood insurance (if applicable), and HOA dues if applicable) divided into your total monthly income.
● Back-end DTIs (debt ratio): Total of all other current debt that shows on your credit report divided into the total monthly income.
The housing ratio can be a helpful DTI to consider when looking at your financial picture. If your new housing payment goes up a considerable amount, lenders may consider it a “payment housing shock” and it could affect the decision on making an exception or requiring additional reserves when approving your loan.
What Is Considered a Good DTI When Applying for a Mortgage?
In general, the ideal DTI is 36% , though that is not necessarily the maximum. For instance, DTI limits can change based on whether or not you are considering a qualified or non-qualified mortgage. A qualified mortgage is a home loan with more stable features and without risky features like negative amortization or interest-only payments. Qualified mortgages also have limits on how high your DTI can be.
A non-qualified mortgage loan is not inherently high-risk, nor is it subprime. It is simply a loan that doesn’t fit into the complex rules associated with a qualified mortgage. Non-qualified mortgages can be helpful for borrowers in unique circumstances, such as having been self-employed for less than 2 years. In terms of DTIs non-qualified mortgages can make it possible for a lender to make an exception if you have a high DTI. For example, if you have high reserves a lender can make an exception to fund your mortgage even if your DTI is not ideal.
In general, borrowers looking for a qualified mortgage can expect to find lenders who will accept a DTI of 43% or less. Under certain criteria, a maximum allowable DTI ratio can be as high as 50% .
How Can I Lower My Debt-to-Income Ratio?
So what do you do if the number you’ve calculated isn’t your ideal? There are two ways to lower your DTI: increase your income or decrease your debt. Working overtime, working a side gig, getting a new job, or asking for a raise are all good options.
But in terms of decreasing debt, strangely enough, if you choose tackling your debt by only increasing your payments each month it could have a negative effect on your DTI. Instead, it can be a good idea to consider ways to reduce your outstanding debt all together.
For example, if you’re struggling with student loan debt, refinancing might be an option to lower the total interest owed. Many lenders are offering competitive rates in terms of refinancing student loans, and you may be able to refinance at a lower interest rate.
If you’re trying to pay off high interest credit card debt, there’s a good chance your DTI might be suffering from those high recurring credit card payments. One way to reduce that debt is to take out a credit card consolidation loan at a lower interest rate. This can be a way of lowering payments on a monthly basis, thus changing your DTI.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.