Debt-to-income ratio is a concept of personal finance. It is, basically, the ratio between your recurring debt and gross income. It is of two types and can be calculated on monthly or yearly basis. The debt-to-income ratio calculator here allows you to calculate both types of ratios i.e. Front-end ratio and back-end ratio. Let's discover the two in detail.
The front-end ratio is calculated by dividing your total housing costs for a month by your gross monthly income. This ratio doesn't just cover your mortgage or rental payments, but also takes into account any other costs that are associated to housing such as property taxes, insurance, HOA/Co-Op Fee, etc.
The back-end ratio basically represents all-encompassing debt which is associated to a household or an individual. It covers all the variables from front-end ratio that are linked to housing costs and factors in any monthly debt accrued to the individual such as car loans, credit cards, student loans, etc. The ratio we're talking about here is defined commonly as debt-to-income ratio and is used more widely as compared to the front-end ratio.
As far as the US is concerned, DTI is used by the lenders for qualifying borrowers. Usually, front-end DTI/back-end DTI limits are 28/36 for the conventional financing. When it comes to FHA limits, it stands at 31/43 and for limits on the VA loan it is 41 straight. House affordability calculator can be used for evaluating debt-to-income ratios as well as their importance to determine loan amounts that apply to all the qualifying households for buying a house.
Though these ratios are used widely by lenders as a technical tool for handing out mortgages, anyone can use them for evaluating where they stand when it comes to their financial health. However, remember that situations can differ. Consider some young doctor recently buying a new home and going under mortgage and student debts and someone who hasn’t gone to college ever. Talking about the US, a 1/3 DTI or anything under it is thought to be easily manageable. If DTI is 1/2, it is considered to be dangerous and quite stressful. In that case, it is important to take immediate action. For instance, you can cut a vacation, take second job or even avoid dining out.