What Debt To Income Ratios Mean

Whenever prospective homeowners approach a mortgage lender about qualifying for a new home loan, they’re generally most concerned with two things – the down payment (the amount of cash they can initially pay for the home and the percentage of value that represents) and their credit score (the FICO rating – which should ideally be above seven hundred). However, many new homeowners are shocked to discover that the loan officers and underwriters care far less about credit scores and down payments than something call the DTI.

For mortgage lenders, DTI (or debt to income ratio) calculates precisely how much each borrower owes as a portion of their gross income. For reasons that should be clear, lenders prize this ratio as the best method of assessing what percentage of their available earnings (once taxes and monthly minimum debt payments have been deducted) would go toward the mortgage payments as well as figuring out which borrowers will best be able to pay back significant sums.

Now, when calculating the debt to income ratio, lenders do not look at the total balance owed. For the purposes of the ratio, they only care about the minimum revolving debt payments – what’s paid every month for auto loans, credit cards, student loans, charge accounts, credit lines, and similar debt burdens. Utilities, for example, are generally ignored. Payment histories and credit ratings still make a difference, of course, but they’re generally considered secondary when real estate financing is studied by debt relief professionals.