Central Mortgage Blog

The “top” debt ratio is defined as Top Debt Ratio= Monthly housing expense/gross monthly income by “monthly housing expense.” We mean the borrower’s monthly rent payment, or he-she owns a home, the total of the following:
1. First mortgage payment
2. Real estate taxes (annual cost-12 months)
3. Fire insurance
4. Homeowner’s home association dues “if it is a condo or townhouse”
5. Second mortgage “if any”
6. Third mortgage “if any” You will often hear the term “PITI.” It refers to the Principal, Interest, Taxes and Insurance.
While PITI is not exactly the same as monthly housing expense because it does not include homeowner’s association dues, the two terms are often used interchangeably. Lenders have learned over the years that borrower’s “Top” Debt Ratio should not exceed 25%. In other words, a person’s housing expense should not exceed 1/4 of his income.
While lenders will often stretch this number to add as high as 28%. The traditional lending theory maintains that anyone with a debt ratio in excess of 25% stands a good chance of developing budget problems. Stay tuned for the explanation of the “bottom” debt ratio.