Whereas FICO score is used as an indicator of an individual's willingness to repay his or her loan, DTI ratio is a measure of the individual's ability to repay it. (Note that DTI ratios are not provided in Exhibit 5.2.) Two DTI ratios are used commonly in mortgage underwriting, the front end and back end. The front-end ratio divides a homeowner's housing-related payments (including principal, interest, real estate taxes, and home insurance payments) by gross income. A back-end ratio divides total monthly debt payments (including housing-related payments plus all credit card and automobile debt, as well as child payments and other long-term obligations) by gross income.
In the agency market, 28% is an acceptable front-end ratio and 38% an acceptable back-end ratio. Some exceptions may be made for compensating factors, such as a high FICO score. Front-end DTI ratios average around 35% for jumbo and alt-A deals and 40% for subprime. While they vary between issuers, back-end DTI ratios in subprime deals average over 50%.
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