Debt-to-Income ratio or DTI is the percentage of a person’s monthly gross (before tax) income that is committed to repaying debts. Lenders use two versions of the DTI…front-end and back-end.
Front-end DTI is the percentage of your income that is committed for housing. For renters this is the monthly rent and any renter’s insurance paid. For a homeowner, this is the mortgage principal and interest, mortgage insurance(if paid), hazard insurance premium, property taxes, and homeowners association dues.
Back-end DTI is the percentage of your income that is committed to paying all recurring debts. The back-end ratio includes everything considered in the front-end DTI plus covered by the first DTI, credit card payments, auto loan payments, student loan payments, child support and/or alimony payments, along with and legal judgments or collection actions.
Required Debt-to-Income Ratios
Most lenders will only approve a loan if you have 35 percent or less committed to back-end DTI. If you have an annual income of $45,000, you should have less than $1,350 per month committed to the debts listed.
Some lenders have been known to stretch the DTI ratio. Some government sponsored mortgage loans will consider a DTI as high as 41 percent. There are some auto lenders who will consider a higher DTI as well, sometimes up to 50%. You may have to go online to find the auto lender that will accept your DTI, but there are reliable options to help you get the auto loan that you need.
Minimizing Your DTI Prior to Application
If you want a lower interest rate and better chances of approval, you can minimize your debt-to-income ratio prior to applying for your car loan. This would typically be done by paying down a good portion of your credit card debt, if you have the funds available.