There are two debt-to-income (DTI) ratios on every loan: housing or front-end ratio and total or back-end ratio. The housing ratio tells us what percentage of the borrower’s monthly gross income is allocated toward the monthly principal, interest, tax, and insurance (PITI) payment. The total ratio includes the monthly PITI and all other monthly debts including auto loans, credit cards, child support expenses, student loans and more.
PITI / Total Qualifying Monthly Income = Front-end %
(PITI + All other Debts) / Monthly Income = Back-end %
The DTI ratios are one of the cornerstones of mortgage lending. They help us determine the borrower’s ability to repay the mortgage loan. Historically, borrowers with a higher DTI have had a higher default rate, making them a higher risk for lending. As a result, Fannie Mae, Freddie Mac, FHA, private mortgage insurance (PMI) companies, and investors have all set DTI limits based on program, product, property, and loan purpose.
As an underwriter or processor, it is our duty to insure the DTI on our automated underwriting system (AUS) findings is correct and matching the Underwriting Transmittal (1008). We should be performing a manual DTI calculation to double check our loan origination systems’ (LOS) calculation.
There are times when data is entered incorrectly into the LOS and the ratios are inaccurate. The most common factor that creates a DTI error is when the borrower owns multiple properties. When entering the housing expenses for these properties, you must learn how to properly manipulate your LOS to yield the correct DTI. Performing the manual calculation is the way to “back into” the correct DTI.
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