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May 25, 2022

What is a Debt-to-Income Ratio (DTI) and Why is it Important?

A good Debt-to-Income Ratio (DTI) to get approved for a mortgage is under 36%. A higher ratio could mean you'll pay more in interest or not get the loan.

 

Your Debt-to-Income Ratio, or DTI, is the percentage of your monthly gross income that goes toward paying your debts, and it helps a lender decide how much you can safely borrower.

 

How to Calculate your DTI

Divide your monthly debt obligations by your pretax, or gross, monthly income. (DTI generally leaves our monthly expenses such as food, utilities, transportation costs and health insurance.)

You'll want the lowest DTI not just to qualify but to get the best possible interest rate and terms for your home loan to be sure you can comfortable afford all your monthly obligations.

Types of Debt-to-Income Ratios

Front-end Ratio

This is also known as your housing ratio. The front-end ratio is the dollar amount of your home-related expenses, such as your future monthly mortgage payment including property taxes, insurance and any homeowners association dues - divided by your monthly gross income.

Back-end Ratio

Your back-end ratio includes all other debts you pay on a monthly basis, such as credit cards, auto loans, personal loans, and student loans - in addition to your home-related expenses - divided by your monthly gross income.

 

What is a Good DTI Ratio?

A good target for a front-end DTI ratio is below 28%, and a for a back-end target DTI is below 36%.

You can qualify for a mortgage with highter DTI ratios, but the interest rate might be higher.

 

What to do if Your DTI is High?

  • Pay Off Debt - pay off monthly debt at least 30 days prior to applying for a mortgage so the payment will drop off your credit report at the time of application.
  • Avoid Taking on More Debt - don't make any big purchases on credit cards before you apply for a home loan
  • Wait to Apply - If your ratio is over 50%, it makes sense to wait to apply until you've reduced the ratio.

 

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                             Divison of Banking Locations                                                                                  Phone Numbers

          Springfield Office                               Chicago Office                                          General Inquires                              TTY

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       Springfield, IL 62786                        Chicago, IL 6060                                                                 1-844-768-1713

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                             Divison of Banking Locations                                                                                  Phone Numbers

          Springfield Office                               Chicago Office                                          General Inquires                              TTY

        Division of Banking                         Divison of Banking                                       1-888-473-4858                   1-866-325-4949 

 320 West Washington Street       100 West Randolph, 9th Floor                                                  Divison of Banking

       Springfield, IL 62786                        Chicago, IL 6060                                                                 1-844-768-1713