DTI Ratios: What Homeowners Need to Know
By Ralph R. Private mortgage insurance (PMI) payments fall outside this
Roberts calculation under the current government plan.
Ask Calculating the Back-End DTI Ratio
about their DTI To calculate the back-end DTI ratio, instruct homeowners to
(debt-to-income) total their monthly debt payments, including: House payment or
ratios, and PITIA, as discussed in the previous section; Any payments on
they’re likely to second mortgages, home-equity loans, or home-equity lines of
respond with credit; credit card payments; auto loan or lease payments;
something like, alimony and other payments on credit accounts or loans.
“My what Now, they should divide their total monthly debt payments by
ratios?!” their total gross monthly household income:
distressed Monthly Debt Payments / Gross Monthly Household Income =
homeowners are sizing up their foreclosure options, they need Back-End DTI Ratio
to brush up on DTI ratios. Lenders will be scrutinizing these Exploring DTI Ratios under Obama’s Foreclosure
ratios to determine homeowner eligibility for loan modification Prevention Plan
and other debt relief.
The Home Affordable Modification Program accounts for both
Homeowners need to know that their DTI ratios are crucial to front-end and back-end DTI ratios. When attempting to reach
determining an affordable house payment. The current
the 31% target for the front-end DTI, the focus is only on the
government plan defines an affordable house payment as one first mortgage:
that is no higher than 31% of the homeowner’s front-end DTI.
In other words, the house payment or PITIA (principal, interest, For qualifying homeowners, the lender will have to first reduce
taxes, insurance, and any association fees) on the first payments on the first mortgage to no greater than a 38% front-
mortgage cannot exceed 31% of the household’s gross end DTI ratio. Treasury will match further reductions in monthly
monthly income. payments dollar-for-dollar with the lender/investor, down to a
31% front-end DTI ratio.
Encourage homeowners to examine both their front-end
and back-end DTI ratios: Borrowers who qualify for a modification but would have a
post-modification back-end DTI ratio greater than or equal to
Front-end DTI ratio is based solely on the house payment. 55%, will be provided with a letter stating that they are required
(Under the current government plan, the front-end DTI target of to work with a HUD-approved counselor. The modification will
31% accounts only for the first mortgage. If the home has other not take effect until they provide a signed statement indicating
liens against it, such as a second mortgage or home equity line that they will obtain counseling.
of credit, those are accounted for separately as part of the
back-end DTI.) Keep in mind that only lenders, investors, and servicers who
choose to participate in this program are bound by its
Back-end DTI ratio is based on all monthly debt payments guidelines and that the guidelines may change over time.
combined, including the house payment, credit card payments, Different lenders may have their own DTI ratio targets and
payments on auto loans, and other loan payments. limitations.
Calculating the Front-End DTI Ratio
When homeowners in your market are in default or in danger
Although the formulas for calculating DTI ratios are simple, of default, encourage them to explore their options. Now that
homeowners are unlikely to have encountered them in the they can calculate their DTI ratios, they have one more tool
past. To calculate their front-end DTI, instruct homeowners to that will empower them to assess their options, keep their
divide their house payment by their monthly household income house, and preserve their American Dream of homeownership.
House Payment / Gross Monthly Household Income = Front-
End DTI Ratio
This is easy, assuming the monthly house payment includes
an amount held in escrow to pay the property taxes, Ralph R. Roberts is a consumer advocate, spokesperson for
homeowner’s insurance, and any association fees. Such a Federal Loan Modification Law Center host of
payment is often referred to as PITIA (principal, interest, taxes, keepmyhouse.com, and author of numerous books, including
insurance, and association fees). Foreclosure Self-Defense For Dummies and Loan Modification
For Dummies (Summer, 2009). Ralph is based in Sterling
If they pay property taxes, insurance, and association fees Heights, Michigan and can be reached at
separately, then they have to perform an extra step. Instruct RalphRoberts@RalphRoberts.com.
them to total these additional annual expenses, divide by 12
months, and add the result to their monthly house payment
(principal and interest). They can then divide the resulting
house payment by their monthly household income to RISMEDIA, March 13, 2009
determine their front-end DTI ratio.