What’s a Debt-to-Income (DTI) Ratio?

If you’re applying for a loan modification, your debt-to-income ratio could be a factor.

By , Attorney

If you apply for a loan modification, the servicer (on behalf of the loan owner or "investor") will evaluate whether you can afford a lower, modified payment. As part of the analysis, the servicer sometimes looks at your front-end debt-to-income (DTI) ratio. The servicer might deny your modification request if your current DTI ratio is too high.

But if your current DTI ratio isn't that bad and you meet other eligibility requirements, the servicer will usually take specific steps, like lowering your interest rate, to reduce your payment to a level that fits DTI ratio guidelines for a particular modification program.

A borrower's front-end DTI ratio is the percentage of gross (before taxes) monthly income that goes towards a mortgage payment. To determine your front-end DTI ratio, divide your total housing payment—including principal, interest, taxes, insurance, and homeowners' association feesby your gross monthly income. Or you can use Fannie Mae's Debt-to-Income Calculator.

Example. Let's say Taylor's gross monthly income is \$5,000 per month. His mortgage payment is \$1,500 per month, property taxes are \$400 per month, and the homeowners' association payment, which includes insurance, is \$200 per month. Taylor's total monthly housing expense is \$1,800. His front-end DTI ratio is 42% (\$2,100 divided by \$5,000).

If you apply for a modification and the servicer denies your request because your front-end DTI ratio is too high, this means the servicer believes you have too many expenses and too little income to make payments even if you got a modification. But if your DTI ratio isn't too high (and you otherwise qualify for a modification), the servicer will take steps to reduce your payment so that your DTI ratio will meet the guidelines for a specific modification program.

Different Modification Programs Have Different DTI Requirements

Investors set specific DTI guidelines for their loan modification programs. To lower a borrower's monthly payment as part of a modification and get to an acceptable DTI ratio, the servicer will typically:

• lower the interest rate
• extend the term (length) of the loan, or
• forbear some of the principal. (A principal forbearance is when a portion of the unpaid balance is set aside before the monthly payment is calculated. This amount does not accrue interest and is due in a balloon payment when the loan term ends.)

For some modification programs, the front-end DTI ratio can't be more than a specific amount, like 31%. In such a scenario, the modified house payment couldn't be more than 31% of the borrower's gross monthly income.

Example. Say your current mortgage payment is \$2,500. If your gross monthly income is around \$4,839, a modification would have to lower your payment to \$1,500 to be at a 31% DTI ratio.

DTI ratio requirements vary by investor and program. Most modification programs allow a DTI ratio between 25% and 42%, although this isn't set in stone. Depending on the modification type and your circumstances, the investor might have flexible DTI requirements or not consider the DTI ratio.

Getting Help

If you need help applying for a modification, talk to a foreclosure lawyer or a HUD-approved housing counselor.