Debt-to-Income Ratio (DTI)
Definition
The debt-to-income ratio (DTI) compares a borrower's monthly debt obligations to their gross monthly income. It is used by lenders to determine how much mortgage a borrower can afford.
Example
A borrower earns $8,000/month gross. Proposed PITI is $2,000, car payment is $400, and student loans are $200. Front-end DTI = $2,000 / $8,000 = 25%. Back-end DTI = ($2,000 + $400 + $200) / $8,000 = 32.5%. Both are within conventional guidelines.
Exam Tip
Always use GROSS (pre-tax) income, never net income. Memorize conventional thresholds: 28% front-end and 36% back-end. The front-end ratio includes only housing costs; the back-end includes all recurring debts. If either ratio exceeds the guideline, the borrower may not qualify.
Related Financing Terms
Deed (in foreclosure context)
In the context of foreclosure, a deed transfers ownership of the foreclosed property to the new owner, typically the buyer at a foreclosure sale.
Trustee Sale
A trustee sale is a type of foreclosure where a trustee, appointed under a deed of trust, sells the property at auction to satisfy the debt.
Foreclosure
Foreclosure is the legal process by which a lender takes possession of a property when a borrower fails to make mortgage payments. It allows the lender to sell the property to recover the outstanding debt.
Conventional Loan
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
FHA Loan
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
VA Loan
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
Frequently Asked Questions
Test Your Financing Knowledge
Practice with exam-style questions to make sure you can apply Debt-to-Income Ratio (DTI) and other financing concepts.