When you are applying for a mortgage, one important metric used to assess your qualifications is your debt-to-income (DTI) ratio.
There are actually two different types of DTIs: your back-end DTI and your front-end DTI. Let’s explain the difference between them.
What is Front-End DTI?
With both types of DTI ratios, we are comparing your gross income to your debts. But with front-end DTI, we are only looking at how your gross income compares to your housing expenses. Other types of expenses are not taken into account.
Here are some of the types of expenses that factor into calculating your front-end DTI ratio:
- Mortgage payment
- Mortgage insurance
- Homeowner’s insurance
- Homeowner’s association fees
- Property taxes
What is Back-End DTI?
Back-end DTI is more comprehensive than front-end DTI. Back-end DTI compares your gross income to all of your monthly recurring debts. These include the following:
- All of the housing expenses listed above
- Vehicle loans
- Student loans
- Child support
- Alimony
- Credit card debt
- Lines of credit
- Personal loans
- Other types of lease payments
- Rental payments
As you can see, neither type of DTI ratio includes one-off expenses, even if you have to make them regularly, i.e. your groceries. Utilities and insurance unrelated to your home do not count either, even though these are recurring bills. Nor do you include your taxes. None of these are considered “debt,” even though they impact your finances and what you can afford.
Don’t forget to account for those additional expenses when you are calculating how much house you can afford; do not just rely on the DTI ratio.
Apply for a Flexible Home Loan
Now you know what goes into calculating both types of DTI ratios: front-end and back-end. If you are looking for advice on how you can lower your DTI ratio, see, “Tips to Improve Your Debt-to-Income (DTI) Ratio When Applying for a Mortgage.”
Ready to apply for a mortgage? We can help you buy a home with a flexible, affordable mortgage. Please give us a call at (248) 788-0800 to schedule your consultation. We can help you buy a home in Michigan or 15 other states.
