DTI

DTI (Debt-to-Income) is the ratio of total monthly debt service to gross monthly income, expressed as a percentage. Mortgage lenders use it as the back-end ratio in qualifying you for a loan.

Two flavours:

• Front-end DTI — housing-related debt only (PITI: principal, interest, taxes, insurance). Standard ceiling: 28% of gross income for a conservative loan.
• Back-end DTI — all debt service (housing PITI plus car loans, student loans, credit-card minimums, alimony, child support). Standard ceiling: 36% conservative, 43% under the Qualified Mortgage rule, up to 50% in some FHA programs.

Notes that catch borrowers off-guard:

• Gross income, not net. The denominator is pre-tax. A household with 30% effective tax rate at the 36% DTI ceiling is really spending 51% of take-home pay on debt.
• Minimum payments count. A credit card with $20,000 balance and $400 minimum counts as $400/month — not the full balance. Carrying a large credit card balance hurts DTI through the minimum payment, not the balance directly.
• Income definition. Salaried W-2 income counts straightforward. Self-employed income is averaged over two years and may be discounted. Bonus and commission income often need a two-year history to count fully.

Lower DTI = better loan terms. Pay down high-minimum debts before applying for a mortgage; closing unused credit cards typically doesn’t help DTI (the minimum payment was already $0), but can hurt utilisation on credit-score formulas. The trade-off is worth working through case by case.