A debt to income ratio (DTI) is a formula used by lenders when determining the eligibility of a consumer for credit products, mostly for mortgages.
It is used to determine the percentage of a consumer’s gross monthly income that goes towards the payment of their debts.
There are two kinds of DTI, which are expressed using a pair, for example 28/36.
The first type of DTI determines the percentage of income that goes towards paying debts related to housing, such as the mortgage amount, property taxes, condo fees, etc. It is normally referred to as a front ratio.
The second number in the pair is called a back ratio, and includes the percentage of income that goes to pay all recurring monthly debts, including housing related payments, credit card payments, student loans, car loans, etc.
For example, in order to be qualified for a mortgage in which the lender requires a DTI of 28/36:
$5000 Gross Monthly Income x 0.28 = $1400 is allowed for housing-related expenses.
$5000 Gross Monthly Income x 0.36 = $1800 is allowed for housing expenses plus other recurring debts.
