Debt-to-Income Ratio

The debt-to-income ratio measures the percentage of monthly gross income that is consumed by debt and housing payments. Lenders use the ratio to help determine the size of a loan for which a potential borrower might qualify. Two types of ratios are often considered: the front end, which measures only housing costs, including loan payments, insurance premiums and taxes, and the back end, which measures all debt payments. For example, if a mortgage program allows for no more than a 25% front end and a 40% back end ratio, a borrower with a $4,000 income could qualify for a loan with $1,000 a month in mortgage, insurance and tax costs -- but only if other debts add no more than $600 a month to the total.