Your debt to income ratio is simply a way of determining how much money is available for your monthly mortgage payment after all your other recurring debt obligations are met.
There are two types of debt-to-income ratios that lenders look at when you apply for a mortgage:
The front-end ratio, also called the housing ratio, shows what percentage of your income would go toward your housing expenses, including your monthly mortgage payment, real estate taxes, homeowner's insurance and association dues.
The back-end ratio shows what portion of your income is needed to cover all of your monthly debt obligations. This includes credit card bills, car loans, child support, student loans and any other debt that shows on your credit report that requires monthly payments, plus your mortgage payments and other housing expenses.
To calculate the front-end ratio, add up your expected housing expenses and divide it by how much you earn each month before taxes (your gross monthly income). Multiply the result by 100 and that is your front-end DTI ratio. For instance, if all your housing-related expenses total $1,000 and your monthly income is $3,000, your DTI is 33 percent.
To determine the back-end ratio, add up your monthly debt expenses with your housing expenses and divide the result by your monthly gross income. For instance, suppose you pay $200 per month for a car loan, $50 per month in student loans, and about $100 per month in credit card bills. That adds up to $1,350 in monthly debt obligations, including housing expenses. Based on a monthly income of $3,000, your back-end ratio would be 45 percent.