Understanding Debt-To-Income Ratio

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When applying for a loan modification, your debt-to-income (DTI) ratio is the key to calculating an affordable house payment. President Obama’s foreclosure prevention plan sets the target front-end DTI for the first mortgage at 31 percent. In other words, your house payment or PITIA (principal, interest, taxes, insurance, and homeowner association fees) cannot exceed 31 percent of your gross monthly income. The DTI ratio comes in two flavors:

  • Front-end DTI ratio is based on your house payment. (Under the Obama plan, the front-end DTI target of 31 percent accounts only for the first mortgage. If you other loans against your home, such as a second mortgage or home equity line of credit, you account for those separately as part of your back-end DTI.)
  • Back-end DTI ratio is based on all monthly debt payments combined, including your house payment, credit card payments, payments on auto loans, and other loan payments.

Calculating Your Front-End DTI Ratio

To calculate your front-end DTI, divide your house payment by your gross monthly household income:

House Payment / Gross Monthly Household Income = Front-End DTI Ratio

This is easy, assuming your monthly house payment includes a monthly amount held in escrow to pay your property taxes, homeowner’s insurance, and any homeowner association fees. Such a payment is often referred to as PITIA (principal, interest, taxes, insurance, and association fees). You simply divide your PITIA amount by your gross monthly household income.

If you pay property taxes, insurance, and homeowner association fees separately, then add them all up, divide by 12 months, and add the result to your monthly house payment (principal and interest). You can then divide the resulting house payment by your gross monthly household income to determine your front-end DTI ratio.

Note: Private mortgage insurance (PMI) payments fall outside this calculation under President Obama’s guidelines.

Calculating Your Back-End DTI Ratio

To calculate your back-end DTI ratio, add up all your monthly debt payments, including:

  • House payment or PITIA, as discussed in the previous section
  • Any payments on second mortgages, home-equity loans, or home-equity lines of credit
  • Credit card payments
  • Auto loan or lease payments
  • Alimony
  • Other payments on credit accounts or loans

Now, divide your total monthly debt payments by your total gross monthly household income:

Monthly Debt Payments / Gross Monthly Household Income = Back-End DTI Ratio

Exploring DTI Ratios Under Obama’s Foreclosure Prevention Plan

The government’s Home Affordable Modification Program accounts for both front-end and back-end DTI ratios. When attempting to reach the 31% Target Front-End DTI, the focus is only on the first mortgage:

  • For qualifying homeowners, the lender will have to first reduce payments on the first mortgage to no greater than a 38 percent front-end DTI ratio. Treasury will match further reductions in monthly payments dollar-for-dollar with the lender/investor, down to a 31 percent front-end DTI ratio.
  • Borrowers who qualify for a modification but would have a post-modification back-end DTI ratio greater than or equal to 55 percent, will be provided with a letter stating that they are required to work with a HUD-approved counselor. The modification will not take effect until they provide a signed statement indicating that they will obtain counseling.

Keep in mind that only lenders, investors, and servicers who choose to participate in this program are bound by its guidelines and that the guidelines may change over time. Your lender may have its own DTI ratio targets and limitations.

I encourage you to consult with a qualified third-party representative who has experience in loan modifications to assist you in determining what your lender’s DTI-ratio targets and limitations are. Although you can negotiate directly with your lender, you really should have representation of your own to protect your interests.

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Ralph R. Roberts, GRI, CRS
Award-Winning REALTOR® and Author
Loan Modification For Dummies (avail. Summer 2009)


  1. meggybell Says:

    Very nice article! You make it real simple to read and understand. Thanks Ralph!

  2. Richard Says:

    Good article. However, is the reality the same as in your article? I have called Countrywide my mortgage lender every single day since the announcement of the Making Home Affordable program. I was laid off from my job in December and have been collecting unemployment benefits, my wife is still working but our income has been cut in half. We owe $485,000 on our house, the current market rate in our area reflects that the going rate for a similar house sells for not more than $400,000 that excludes us from refinancing but everytime I have called Countrywide I am referred to refinancing. Nobody will even discuss modification and according to financialstability.gov we qualify for the Modification as opposed to the refinance. I am totally conflicted. In my opinion Countrywide does not want to help.

    Any opinions?

  3. saul Says:

    countrywide is a horrible company. in my opinion they make things extremely difficult and challenging so they dont have to help. their customer service is horrific and their people dont seem to have any answers as well. i am experiencing similiar troubles. they DONT WANT TO HELP!

  4. Jarvis Says:

    Let’s all be real here. None of these banks/lenders want to ‘help’ homeowners. If it’s good for their bottom line, they MAY work with someone. If not, it’s down that foreclosure road. Loss mitigation is another qualifying process. It is mostly a ‘band aid’ on a gushing wound. Unfortunately, not all homeowners realistically can expect to keep their homes. They should never have been allowed to ‘qualify’ for them in the first place. I now work with a mortgage audit program where we deal with the legal department and NOT loss mitigation. At least we can get some cash damages for wronged borrowers, and often a ‘reconstructed, affordable’ loan which is NOT qualified for. Remember, the job of all the ‘phone answerers’ is to make you GO AWAY. If you don’t easily fit into one of their ‘boxes’…too bad. While there are many scams, there are those entities who CAN help. We don’t make false promises, but often the not knowing is what is stressful. As usual, those ‘free government resources’ are also a joke.

  5. Luis D Roque Says:

    I am a VP loan officer at Bank of America and I know people that work in the loan modification department. Although the Bank has received the details of the Obama loan modification plan, they have not yet put it into effect to be offered to the public. Remember, not all banks are doing this modifications but I was told that they will be putting this loan modifications in place very soon. Just be patient and they will start offering this modifications. The best number to call is 800-846-2222 or 800-934-6608

  6. M. Smith Says:

    I am interested in getting a loan modification if possible but not real clear on the qualifications. Our front end debt/income is 29% (certainly not bad). However due to accumulated medical debt over the last 13 years our back end debt/income ratio is 79% ( at least half of which is related to medical debt). I was laid off last month, and my husband has had to take a 15-25% paycut( variance due to loss of all bonuses on top of 10% pay cut). Do I understand you correctly that we may qualify if we go for financial counseling through HUD? And will I need to get paper proof of all our medical bills over the last 13 years?

  7. meggybell Says:

    Great articles Ralph, you really explain things well.

  8. At least we can get some cash damages for wronged borrowers, and often a ‘reconstructed, affordable’ loan which is NOT qualified for. Remember, the job of all the ‘phone answerers’ is to make you GO AWAY. If you don’t easily fit into one of their ‘boxes’…too bad. While there are many scams, there are those entities who CAN help.

  9. Julie Says:

    If I did this right, mortgage payment/ monthly income=Front-End DTI Ratio, I get a number of .770 actually it was .769###### (lots of numbers) I rounded up to .770. How the heck did Citi Mortgage give us this loan? that’s more than 75 percent of our income.

  10. G Says:

    Julie: And you blame it on Citi? When will we Americans learn that we are responsible for our own actions? Did you take more debt that you can afford? It’s your mistake, not Citi’s. Period. You can add, right?

  11. kimmy Says:

    I have the same problem with country wide every time I call they always say please call back in two weeks this is still new for us but since march and now I just call them on 4/27 they say the same thing what going on do they try to lie to us ?…

  12. Yvonne McNeil Says:

    Can another bank do a loan modification on a loan we received thorugh Lehman Brother’s Bank and Aurora Loan Services?

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