Debt to Income Ratios

Written By: Frankie Lacy, Op-Ed Writer

There are two debt-to-income (DTI) ratios on every loan: housing or front-end ratio and total or back-end ratio. The housing ratio tells us what percentage of the borrower’s monthly gross income is allocated toward the monthly principal, interest, tax, and insurance (PITI) payment. The total ratio includes the monthly PITI and all other monthly debts including auto loans, credit cards, child support expenses, student loans and more.

PITI / Total Qualifying Monthly Income = Front-end %

(PITI + All other Debts) / Monthly Income = Back-end %

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The DTI ratios are one of the cornerstones of mortgage lending. They help us determine the borrower’s ability to repay the mortgage loan. Historically, borrowers with a higher DTI have had a higher default rate, making them a higher risk for lending. As a result, Fannie Mae, Freddie Mac, FHA, private mortgage insurance (PMI) companies, and investors have all set DTI limits based on program, product, property, and loan purpose.

As an underwriter or processor, it is our duty to insure the DTI on our automated underwriting system (AUS) findings is correct and matching the Underwriting Transmittal (1008). We should be performing a manual DTI calculation to double check our loan origination systems’ (LOS) calculation.

There are times when data is entered incorrectly into the LOS and the ratios are inaccurate. The most common factor that creates a DTI error is when the borrower owns multiple properties. When entering the housing expenses for these properties, you must learn how to properly manipulate your LOS to yield the correct DTI. Performing the manual calculation is the way to “back into” the correct DTI.

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Some other issues that affect DTI during the processing of the file are:

• Reconciliation of taxes and homeowners insurance
• Adding HOA dues or special assessments found on the appraisal
• Mortgage insurance (MI) premium increases
• Additional debts located on the bank statements or identified through inquiries on the credit report
• Schedule A un-reimbursed expenses found on the 4506-T transcripts for a wage-earner borrower
• Moving from a floating to locked interest rate
• Renegotiation of the sales price on a purchase transaction

The DTI is constantly changing as data is updated in the LOS. It is our responsibility to ensure the DTI remains within loan program limitations and is matching on the 1008 and AUS findings prior to closing.

About The Author

Frankie Lacy - As an op-ed writer, Ms. Frankie Lacy is a 13-year mortgage industry veteran with extensive conventional mortgage underwriting experience. Topics of Frankie's expertise include: Fannie Mae, Freddie Mac, USDA Rural Housing, underwriting to investor overlays, self-employed borrowers, personal and business tax return analysis, rental income, condos/co-ops/PUDs, and more. Frankie is a Davenport University graduate with a degree in Business Administration. 

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