When it comes to applying for a loan modification, your debt-to-income ratio is really very important. Having the right or wrong DTI ratio can make or break your loan modification. But what is debt to income ratio? Let's dive right in. President Obama's foreclosure prevention plan has it set up so that for your first mortgage, your Front-end debt-to-income ratio can be no more than 31 percent. This basically means that your house payment cannot exceed 31 percent of your gross monthly income. So if for example your monthly mortgage is $1,000, your gross monthly income should be at around $3,230 or more.
There are actually 2 debt-to-income (DTI) ratios to become familiar with:
- First there's your Front-end DTI ratio which is based on your house payment. Under the President's plan, the Front-end DTI ratio target of 31 percent only applies to your first mortgage. Other loans taken against your home such as a second mortgage or an equity line of credit are separate and are not a part of your Front-end DTI. Instead, you can calculate these other loans as a part of your Back-end DTI. But wait, what is Back-end DTI? I'm glad you asked!
- Besides Front-end DTI, you also have your Back-end DTI ratio which is based on all your monthly debt payments combined. This includes your house payment, credit card payments, auto loan payments.
How do I calculate my Front-End debt-to-income ratio?
Easy! Just divide your house payment by your gross monthly household income. Make sure your monthly house payment also includes property taxes and homeowner's insurance. Oh, and you should also include any homeowner association fees if any. Here's the formula.
House Payment / Gross Monthly Household Income = Front-End DTI Ratio
Important Note. Under President Obama's guidelines, private mortgage insurance payments fall outside of this calculation.
How do I calculate my Back-End debt-to-income ratio?
To calculate your back-end DTI ratio, first add up all your monthly debt payments. This includes:
- House payments on your first mortgage.
- Payments on your second mortgage, home-equity loans or home-equity lines of credit, if any.
- Credit card payments.
- Auto loan or lease payments.
- Alimony.
- And pretty much any other payments on credit accounts or loans.
Once you have a total for your monthly debt payments, simply divide it by your total gross monthly household income.
Monthly Debt Payments / Gross Monthly Household Income = Back-End DTI Ratio
DTI Ratios Under Obama’s Foreclosure Prevention Plan:
The government’s Home Affordable Modification Program accounts for both front-end and back-end DTI ratios. When attempting to reach the 31% Target Front-End DTI, the focus is only on the first mortgage:
Keep in mind that your lender, investor, or servicer may have its own DTI ratio targets and limitations. Not all have chosen to take part in the "Obama program."
It's true that DTI is a confusing part of applying for a loan modification, and it's not always cut-and-dry. A qualified representative can help determine what your lender's DTI-ratio targets and limitations are. You can of course negotiate directly with your lender but your chances of success are greater when you have an experienced professional on your side. If you have any questions at all, feel free to ask us in the comments.
