NMLS Laws And Regulations Practice Test

Front-end DTI, or the housing expense ratio, measures how much of a borrower’s income goes toward housing payments. The correct calculation uses total housing expenses, PITI (Principal, Interest, Taxes, and Insurance), divided by gross monthly income. This shows the portion of gross income consumed by housing costs, which lenders assess to gauge affordability. Why this is correct: it directly compares housing costs to gross income, providing a clear sense of whether the borrower can handle the monthly mortgage payment within their income. Why the other approaches don’t fit: inverting the ratio would describe how many dollars of income exist per dollar of housing cost, which isn’t the intended affordability measure. Using net monthly income ignores taxes and deductions that affect actual take-home pay. Including all debt payments would be the back-end DTI, not the front-end housing ratio.