More often referred to as DTI, a borrowers Debt to Income Ratio is a calculation of the relationship between what someone spends and what someone makes.

In simple Math it is just Debt / Income 

How is the Debt Calculated:

Lenders will calculate your debt by what is showing up on your credit report. So things like cell phone bills, or utility bills will not be factored in. Where as credit card minimums, car payments etc. will be. Most credit reports will automatically calculate the sum of monthly payments.

How is Income Calculated:

The Income figure used is based off of your gross pre tax monthly income. If you have recently been given a raise, you typically have to be at that new income level for several months before the bank will count it. 

The Two DTI Types- Front End & Back End

In mortgage there are two types of DTI's- The "Front End" DTI and the "Back End" DTI. 

Your Front Ratio is your expected mortgage payment divided by your income. Lenders typically don't want to see your mortgage exceeding 20% of your gross month income.

Your back end ratio is the sum of your anticipated mortgage as well as all other expenses appearing on your credit report. Lenders typically don't want to see a back end ratio exceeding 40%. 

Bankapedia's Take

While most borrowers have been frustrated by Lenders requiring Lower LTV's (more money down) after the mortgage boom, Banks have also tightened Debt to Income requirements. In 2004 it was not uncommon to see debt to income ratio's as high as 60%, now (2009) your typically seeing back end DTI's max out at 40%. 

Think about that for a second, the Income in DTI is pre-tax, so assume 25% of your gross goes to the IRS. So on a 60% back end DTI- add 25% for taxes and you only have 15% of your income for everything else and everything else is more than just groceries. Again the DTI does not include your power bill, your gas bill, your home and cell phone bills, auto insurance and on top of that food, clothing, gas. Not hard to see how so many people simply walked away from their home and mortgage.