Front-End Debt-to-Income Ratio (DTI)
Candlefocus EditorLenders use the front-end DTI ratio as a way to assess a borrower’s ability to manage their housing costs relative to their income. In general, lenders prefer that a borrower’s front-end DTI is not greater than 28%. A ratio above this level is considered to be too high, increasing the risk of default.
In comparison to the front-end DTI ratio, the back-end DTI ratio more comprehensively reflects a borrower’s financial situation. As opposed to only considering housing expenses, the back-end DTI considers all sources of debt including lines of credit, car payments, student loans, etc. As a result, the back-end DTI ratio reflects the amount of income that is being spent on all forms of debt in comparison to gross income, rather than only housing expenses.
When lenders assess a borrower’s financial situation, they take both DTI ratios into consideration. A high front-end ratio can be compensated for with a low back-end ratio, as this would indicate that the borrower is not overstretching themselves financially. It is important to note, however, that a low back-end ratio does not override a high front-end ratio, and lenders may still deny the loan or increase the borrower’s interest rate due to the higher risk of default.
Overall, the front-end and back-end debt-to-income ratios play an important role in a person’s ability to qualify for a loan and must be taken into careful consideration before applying for a mortgage. The high risk associated with higher DTI ratios requires lenders to be comfortable with the borrower’s overall financial situation and any other factors such as their credit score, employment history and stability. Borrowers should always strive to keep their DTI ratios low in order to maximize their chances of getting approved for a mortgage.