Debt to income ratio, commonly referred to as DTI, is a ratio of the percentage of debt in comparison to the income a borrower has. To put it simply, a DTI shows how borrowers’ debt contrasts with their earnings. Debt to income ratio is considered an important factor in determining whether a loan will be approved. It is used to calculate whether a borrower can afford to repay a loan.
Lenders tend to view borrowers with high DTI as riskier borrowers. This is due to the fact that may encounter hardship in repaying a loan in cases of unexpected economic distress. Borrowers with high DTI ratios may be more likely to default on a loan.
Usually, lenders consider a borrower’s debt to income ratio, combined with their credit history when viewing loan applications. Different lenders tend to have different DTI requirements from borrowers. Typically, personal loan providers permit higher DTI lenders than mortgage providers. This may be due to the fact that personal loans tend to be smaller in scope than mortgage loans.
When applying for a mortgage loan, some lenders like to split DTI into 2. They are sometimes called front end DTI and back end DTI. Front end DTI refers to any housing related debt. This can include monthly mortgage payments, homeowners insurance, taxes and any homeowners association fees if applicable. Back end DTI refers to any credit card debt, personal loans, student loans, and car payments. By combining both of these DTI’s a mortgage lender will have a more complete picture on a prospective borrower.