Joe Brown, President of Edina Realty Mortgage, answers common questions about debt-to-income ratios in this three-part “Ask an expert” series. In part two, Joe talks about how you can easily calculate your debt-to-income ratio and how to use that information for your benefit.

Part two: How do I calculate my debt-to-income ratio?

Key Insights

• Your monthly home payments include your mortgage principal and interest, as well as property taxes and insurance (PITI).
• Calculate your front-end ratio by dividing your PITI by your monthly income; aim for 28-33%
• When determining your back-end ratio, only consider debts–do not add in other living costs like food or utilities.
• Find your back-end ratio by dividing your PITI and other debts by your monthly income; aim for 36-42%.

Welcome back to part two of the series “Everything you need to know about your debt-to-income ratio.” In part one, we talked about what a debt-to-income ratio is and how lenders use it when determining your loan eligibility.

Today, we’re going to focus on how to calculate both your front-end and back-end debt-to-income ratios and what kind of debts and expenses you should be considering when making those calculations.

Calculating your front-end ratio

Remember, your front-end ratio assesses what percentage of your monthly income goes toward your home.It’s a great tool for helping you quickly determine what kinds of properties you can comfortably afford because it focuses solely on home costs. (Note that you’ll need to perform this calculation for every property you look at to determine if it’s affordable for you.)

Before you crunch the numbers, you’ll need to gather all housing costs. Keep in mind that the monthly mortgage payment includes the mortgage principal and interest, as well as property taxes and insurance (PITI).

Here’s how you calculate your front-end ratio:

1. Add up your monthly mortgage payment (PITI).
2. Divide that number by your monthly income before taxes.
3. The final number will be your debt-to-income ratio, shown in a percentage.

That percentage is going to inform a lender if you could make consistent payments. While every loan and lender differs, most mortgage consultants look for a front-end ratio of 28-33% when reviewing a mortgage application.

Let’s use an example: if your gross monthly income is $6,000, and the monthly PITI of your desired home would be $2,000, you’d take $2,000/$6,000 for a front-end ratio of about 33 %. While it’s within the range of what a lender may accept, it’s on the higher end, and finding a property with a lower PITI might be a better option.

Calculating your back-end ratio

Your back-end ratio is a more wholesome assessment of your financial health which takes your total debt into account. Lenders tend to gravitate toward back-end ratios because they consider all of your debt responsibilities.

1. Add up monthly debt, including:
• All housing costs: Monthly mortgage principal and interest, HOA dues, taxes and insurance
• Car loans
• Credit card payments
• Student loans
• Child support

Note that general expenses like food and fuel are not considered part of your total debt. That’s because those payments are not debts, and a debt-to-income ratio looks solely at what payments you are currently on the hook for, and not what future expenses could be. That being said, creating a budget and factoring in needs like transportation, food and utilities is a good practice in determining how much money you’ll have to put toward a home.

2. Divide that number by your monthly income—again, before taxes.
3. The final number will be your back-end debt-to-income ratio, shown in a percentage.

While loan applications vary, mortgage experts typically recommend a back-end ratio of 36-42%.

Continuing with the example above, if you have $550 in monthly student loan and car loan bills, then total monthly debt obligations (including your PITI of $2,000) would be $2,550. With a gross monthly income of $6,000, divide $2,550 by $6,000 for a back-end ratio of about 43%. The back-end ratio is just out of range for this property, but by looking at both the front-end and back-end debt-to-income ratios, we can infer that we’re just on the cusp of falling within that golden range. Luckily, we’ll be talking about how you can lower your debt-to-income ratio in part three!

Until then, feel free to reach out to us at Edina Realty or contact your Edina Realty Mortgage consultant any questions you may have about debt-to-income ratios, or if you need any assistance in calculating your ratios. See you in part three!

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