The Debt to Income Ratio is very simply a ratio that is used by lenders and mortgage banks to determine whether or not a borrower can afford the mortgage that they currently have or are applying for.  Debt to Income is one of the most important factors, in addition to credit score and Loan to Value (LTV) ratios in approving or denying a mortgage application or loan modification or loan workout.  Calculating your debt to income is as simple as dividing your debt by your income. 

When you are applying for a mortgage, the lender will use the Debt to Income calculation to better gauge your ability to pay the mortgage payments by adding the monthly payment for the new debt to your existing debt and then dividing this by your gross monthly income.

There has been a good deal of confusion regarding Debt to Income as there are actually two kinds of DTI ratios.  Calculating your debt to income ratio is an integral part of getting a loan modification through The Obama Administration’s Home Affordable Modification Program (HAMP), as well as can help you verify whether or not you qualify for a loan workout.

The “Front End” Debt to Income Ratio is the first type of debt ratio.  The front end ratio is only used in the mortgage industry, and is simply your total housing payments (principal and interest payments, taxes, insurance, and HOA fees) divided by your total gross income. 

The other type of Debt to Income Ratio is the “Back End” DTI, which takes into account all of your monthly debt.  The Back End Debt to Income Ratio does not include any expenses that are not listed on your credit report, thus, your monthly grocery bills and the amount that you spend on electricity or your phone bill each month is not included in this calculation.  To calculate your back end ratio, total all of the monthly payments on your credit report (including your mortgage) and dividing that number by your gross (pre-tax) monthly income.

The higher that your Debt to Income ratio is, the higher the chance is that you will miss a mortgage payment.  Therefore, mortgage banks will usually deny a loan application from a prospective borrower that has a back end ratio higher than 36 percent.

The key to financial stability is to be as informed as you can with regard to the process and guidelines of lending banks.  Through a good understanding of how a lender views the amount of debt you have in proportion to your income, you may be able to actually negotiate better terms on loans and debts.  Lowering your debt to income ratio will not only help you qualify for loans with better terms, it will also help contribute to your financial stability and increase your quality of life.

If you are paying out less each month for debts, this leaves significantly more money to be devoted to savings, vacations, hobbies, or having fun.  In life, a conservative approach to debt is always rewarding!  I truly hope this has helped answer any questions that you have regarding the two types of Debt-to-Income Ratios, front end and back end.  If you like this article, please Digg it or add to your favorite social book-marking site!

For more information on Debt to Income Ratios and how you can qualify for a mortgage loan modification, please visit ModificationZoom on the web.  Our loss mitigation specialists can connect you with an attorney that will help you save your home and stop foreclosure.