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What is DTI Ratio {How to Calculate Your Debt to Income} - YouTube
Channel: Melissa Blevins
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hey there welcome to my channel I'm
Melissa Blevins from MelissaBlevins.com
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where I teach practical money tips to
the free-spirited nerd. if this is your
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first time here I want to welcome you
and thank you so much for taking the
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time to watch this video today we're
going to be talking about debt to income
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ratio and why it's so important when
buying a house or obtaining any type of
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financing so you have two different
types of DTI or debt to income ratios
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and the first one is the front end ratio
and the front end debt to income ratio
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is pretty simple it's simply your
housing costs so let's say your gross
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monthly income is six thousand dollars
per month and your house payment or your
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rent payment is twelve hundred dollars a
month now if you're calculating this
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based on your house payment you want to
go ahead and add in principle interest
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taxes and homeowners insurance so if
your homeowners insurance and taxes or
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not escrowed into your monthly payment
then you'll want to add in those costs
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as well because that does affect your
DTI on the front end so let's say that
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you grow six thousand dollars a month
and your house payment is twelve hundred
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dollars per month with all of those
factors added in there your DTI would be
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debt divided by income or debt to income
so you take the total amount of your
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house payment twelve hundred and divide
it by six thousand and that would be
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twenty percent so your house payment is
twenty percent of your income so that's
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a really good DTI on the front end and
very affordable house payment for that
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income on the back end ratio it is the
total of the house payment including
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principal interest taxes and insurance
with all of your debts and other
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obligations added in such as alimony or
child support so if you have to pay
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child support court-ordered every month
or alimony those are added in to your
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debts listed when you're listing your
liabilities
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on an on an assets and liabilities sheet
with a banker so you want to calculate
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the total added up of all of your debts
including your house payment and let's
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just assume with the same numbers that
you grow six thousand dollars a month
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and your debts total three thousand
dollars a month including your house
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payment your car payment let's say you
pay some child support every month and
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you've got a couple of credit cards and
car payments so your total debts is
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three thousand dollars per month
three thousand divided by six thousand
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equals fifty percent so that debt to
income ratio on the back end is a lot
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higher so this is a good calculation to
figure on your own whether or not you're
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getting a loan because you want to know
how much of your income is actually
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being eaten up by debt child support and
alimony are something that are
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calculated by the courts and determined
by divorce decrees so that's nothing
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there's nothing that you can do to
change that number but you can pay off
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your debts and make some changes to
start moving towards financial freedom
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so when you apply for a home loan a lot
of lenders will go up to about 42
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percent on the debt to income ratio so
it's always good before you even sit
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down with a lender to take a look at
what your debt to income ratio is before
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they pull your credit and if your
liabilities are up there and pretty high
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you probably want to pay off some debt
before you even consider purchasing a
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home it's just always better to be
prepared and make sure that you've got a
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good emergency fund built up and that
you are setting yourself up for
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financial success rather than inviting
Murphy to come and destroy your world so
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I hope you enjoyed this video if you
liked it give it a big thumbs up don't
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forget to subscribe to the video this is
part of a three-part series on banking
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terms and definitions and you don't want
to miss out on the next one have a good
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day
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