What Is Debt-To-Income Ratio In Real Estate?

For many prospective and actual homebuyers the concept of a debt-to-income (DTI) ratio will be important. From both a commercial and governmental standpoint, this metric can play a major role for certain buyers who participate in the real estate purchase process. As Rocket Mortgage explained, from a banking perspective, people who have high amounts of debt when compared with their income can be considered risky borrowers. The classification of risky as a borrower could mean that the process of finding a willing lender for the home purchase proves challenging. 

When a potential homebuyer applies for a mortgage, he may be required to meet specific DTI standards, as Rocket Mortgage explained. These requirements exist in part as a safeguard against a borrower assuming more debt than he can realistically handle. And while mortgage entities can be helpful sources of information for these economic, commercial, and real estate-based terms, so too can the U.S. government.

To this point, the Consumer Financial Protection Bureau defined debt-to-income ratio as the total of monthly debt payments divided by gross monthly income. Indeed defined gross monthly income as the amount paid to a worker during the month before his taxes and other deductions come out. And as the Consumer Financial Protection Bureau detailed, DTI is one measure that specific lenders use to decide whether a borrower has a reasonable economic capacity to manage his monthly payments for borrowed money.

The Bureau also explained gross monthly income as the amount of money that a person earns before his taxes and other relevant deductions are subtracted from said income. By way of example, if a borrower paid $1,500 per month for his mortgage plus $100 per month for his car loan and $400 per month for remaining miscellaneous debts, then his payments would total $2,000. However, if the borrower's gross monthly earnings totaled $6,000, then his DTI would be 33% percent (because $2K is ⅓ of $6,000).

In general, mortgage loan studies tend to suggest that for many borrowers who have higher DTIs, they are more likely to encounter challenges with respect to their monthly payments, as the Consumer Financial Protection Bureau reported. Realtor documented similar findings in that increasing a borrower's DTI is understood to suggest an increased risk with respect to repayment of the home loan. The Consumer Financial Protection Bureau also explained that under typical circumstances, a 43% DTI is considered to be the outer band for a borrower. At this outer band level, a borrower may generally remain eligible for a qualified mortgage. 

As is often the case, exceptions to this principle do exist. The Consumer Financial Protection Bureau explained that a smaller creditor is required to consider a borrower's DTI. At the same time, the smaller creditor should remain capable of offering a qualified mortgage provided that the borrower has a DTI that is above the 43% threshold.