Debt to Income Ratio

by Investing School on November 5, 2010

Debt to income ratio is a number that defines a certain percentage of a person’s gross monthly income. This is the percentage that would be put toward paying off debts. It is often abbreviated as DTI. Even more specifically, this money is also used to pay taxes, fees and insurance in addition to other debts.

There are two type of debt to income ratios. The first is regarded as a front ratio. This means that the percentage of income is used to cover housing costs. For renters, this would mean the amount of the rent. For homeowners, it refers to the mortgage principal, interest, hazard insurance, property taxes and homeowner’s association fees, if applicable.

The second is called the back ratio. This refers to the income that goes toward paying all recurring debts. These debts include credit cards, car loans, student loans, child support, alimony and legal judgments. This also includes all the debts that are included in the front ratio.
In the United States, the following loans have these limits that are quite common.

  • For conforming loans, the ratio is usually 28/36
  • For FHA loans, they are typically 31/43
  • For VA loans, there is only one debt to income ratio calculated and the number is 41.

The mortgage industry went through significant changes after World War II. After that time, the FHA and the VA helped to create a massive market through the lending of 30-year, fixed-rate, amortized mortgages. This helped to stimulate the real estate market.

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