Applying for a mortgage (and shopping for the best interest rate) can be a complicated process, whether you’re a first-time homebuyer or a seasoned pro. Your debt-to-income ratio (DTI) is one factor lenders consider when deciding whether to approve you for a mortgage, and what rate to offer you if your application is approved. Put simply, DTI is a mathematical way to compare your monthly debt payments vs. your monthly income.
Other factors mortgage lenders consider when you apply include your credit score, your down payment, your employment history, and more. This guide is focused on DTI, as it’s crucial to understand how to calculate your DTI and how your DTI can impact your chances of getting the mortgage terms you’re hoping for. Read on and we’ll break it down.
SPONSORED PARTNER
Rocket Mortgage
| Trustpilot Rating | 4.7 out of 5 |
| Trustpilot Reviews | 30,756 |
| Origination Volume (2022) | 126,258 |
What is a debt-to-income ratio?
Your debt-to-income or DTI ratio is the percentage of income you use to pay your credit obligations on a monthly basis. Lenders calculate DTI ratio by comparing the money you earn each month (pre-tax) to the monthly minimum debt payments you owe to your creditors.
Mortgage lenders use DTI calculations to understand if applicants can handle a monthly mortgage payment and, if so, how much money they can reasonably afford to borrow. If your DTI ratio is too high, it’s a sign that you may be overextended financially and taking out another loan could put you under too much financial pressure. By contrast, a low DTI ratio can indicate that you may be able to handle additional debt and stay current with the resulting payments.
Types of debt-to-income ratios
A lender may consider two different types of debt-to-income ratios during the mortgage process—front-end and back-end DTI.
Spoiler alert: Your back-end DTI is most likely the one you need to be primarily concerned with when applying for a home loan. Now, let’s take a closer look at both types of ratios and why they matter to you as a prospective homebuyer.
Front-end DTI
When lenders calculate your front-end DTI ratio, they’re focused on housing-related expenses. These costs commonly include your principal, interest, taxes, and insurance—lumped together under the acronym “PITI.”
Your front-end DTI ratio should ideally be no more than 28% of your gross monthly income when you take out a mortgage. Yet lenders might not worry about this number with certain types of mortgage applications (FHA loans are one noteworthy exception, and your front-end DTI does matter if this is the type of mortgage you’re seeking).
Regardless of whether your prospective lenders factor in your front-end DTI or not, you should always examine how much house you can afford where your own budget is concerned before committing to a new loan.
Back-end DTI
The number that lenders tend to be most concerned with when you apply for a mortgage is your back-end DTI ratio. This figure includes your housing costs plus the minimum payments on all current credit obligations on your credit report—an overall picture of your monthly spending.
In general, you should spend no more than 36% of your income on combined debts each month. But lenders might still approve you for certain loan programs with a higher DTI ratio.
How to calculate your DTI ratio
Your debt-to-income ratio compares the income you earn to the debt you owe each month.
In simpler terms, your DTI ratio is the percentage of your pre-tax monthly income—aka gross monthly income—that you must use to pay select financial obligations each month, such as minimum credit card and student loan payments, plus your estimated new mortgage payment.
To calculate your DTI ratio, follow the steps outlined below:
- Add up the amount of money you pay each month toward your debts. Include the minimum monthly payments for any debts that appear on your credit report such as credit cards, personal loans, student loans, and car loans. Ignore financial obligations like monthly rent or a mortgage payment (unless you plan to keep the home after you purchase your new property) as well as expenses like your phone bill and utilities.
- Add in your new estimated mortgage payment to your debt total.
- Divide your total monthly debt by your monthly pre-tax income.
- The result—after you convert the figure to a percentage—is your DTI ratio.
Example DTI ratio calculation
For the sake of simplicity, let’s imagine your monthly gross income is $10,000.
At the same time, we’ll assume you owe $1,200 per month in combined debts (e.g., car loan, credit cards, etc.) and that your estimated monthly housing expenses will cost $2,400. In total, that would bring your monthly expenses to $3,600.
Here’s what your DTI calculation would look like in this scenario: $3,600 in total monthly debt / $10,000 gross monthly income X 100 = a 36% DTI ratio.
What’s a good DTI ratio to get approved for a mortgage?
The lower your DTI ratio, the less risk you represent to a mortgage lender. Many lenders will accept borrowers with a DTI ratio of 43% or below. Yet if you have a different DTI ratio, you might still have a chance of qualifying for a home loan.
Below are several DTI ranges along with an explanation of how they might impact your mortgage application:
- 35% and below. A DTI ratio below 36% shows lenders you have a low level of risk as a borrower. It also demonstrates a manageable amount of debt. So, you shouldn’t have trouble qualifying for a mortgage unless there are other factors weighing your application down.
- 36% to 41%. A DTI ratio in this range also signals a manageable level of debt and risk to most lenders. But if you’re attempting to borrow a large amount of money or if your mortgage lender has stricter guidelines, you might need to reduce your debt to qualify.
- 42% to 49%. A DTI ratio in this range may be concerning to lenders, and you may not be eligible for all loan programs. If you find a lender that’s willing to work with you, you might need to meet additional requirements to qualify for financing and your interest rate could be higher.
- 50% or higher. Getting a loan with a DTI ratio in this range can be difficult. Many lenders deny loan applicants with this level of risk. If you find a lender and a loan program that works for you with a DTI ratio this high, expect to pay a high interest rate.
How your DTI ratio can affect your mortgage rate
Your DTI ratio is one of the primary factors lenders review to assess your risk as a potential borrower. Not only does DTI impact your ability to prequalify for a mortgage, it can also influence the interest rate a lender offers you on a home loan.
Learn more: Compare 30-year mortgage rates today.
If you have a higher DTI ratio, a lender is unlikely to extend the best interest rates and terms on your mortgage offer. But if your DTI ratio is on the lower end of the spectrum, or if you’re able to pay down debt to improve your DTI, there’s a chance you might benefit from your efforts in the form of a better loan offer. At the very least, you should be able to save money on your monthly debt payments and interest charges.
Maximum DTI ratio for government-backed mortgages
As a rule, a lower DTI ratio is best when you’re applying for a mortgage. Yet specific DTI requirements can vary according to the home loan program and lender you’re using to secure financing for your home purchase.
DTI requirements for FHA loans
FHA loans have some of the most forgiving qualification requirements when it comes to DTI ratios for borrowers. The maximum DTI ratio for an FHA loan is 57%.
Yet it’s important to understand that not all lenders are willing to work with borrowers who have high DTI ratios. Lenders can set their own individual requirements where DTI ratios (and other loan standards) are concerned.
Some lenders may accept FHA loan borrowers with DTI ratios as high as 57%. Other lenders may set the DTI limits for borrowers at a much lower level—often around 40% instead.
Learn more: FHA loans vs. conventional home loans.
DTI requirements for VA loans
VA loans can be a cost-effective way for eligible active-duty military service members, qualified veterans, and surviving spouses to become homeowners. Not only do VA loans offer eligible borrowers the opportunity to purchase a home with no down payment requirement, VA loans also have more lenient DTI requirements compared with other types of mortgage loans.
With VA loans, there’s no maximum DTI ratio limit. Yet individual lenders are free to set their own guidelines. You’ll want to speak with your own lender to determine what DTI ratio standards you need to meet if you apply for a VA loan. And it’s important to review your budget to make sure you don’t overcommit yourself financially either.
Learn more: Understanding VA loans.
DTI requirements for USDA loans
USDA loans are another government-backed mortgage loan program for low- and moderate-income borrowers who want to purchase homes in eligible rural areas. In general, you need a DTI ratio of 41% or lower to be eligible for a USDA loan.
These affordable loans also feature no down payment and no minimum credit score requirements. But individual lenders often prefer borrowers to have a 620 FICO Score or higher.
Learn more: How to buy a house with bad credit.
How to improve your DTI ratio
Lowering your debt-to-income ratio before you apply for a mortgage may improve your odds of qualifying for a home loan (and receiving a lower interest rate). Here are some tips that could help you lower your DTI ratio.
- Pay down debt. Consider paying down debt before your mortgage application if you can afford to do so. As you reduce the balances you owe to creditors on certain debts, like credit cards, your DTI ratio may decline in response. Plus, if you focus on paying off credit card debt, you could enjoy the added benefits of improving your credit score and saving money on credit card interest charges as well.
- Increase your income. Earning more money is another potential way to improve your DTI ratio. But it’s important to understand that this strategy might not be a quick fix where your mortgage application is concerned. Getting a raise at work could be helpful if your employer is willing to provide a letter stating that the income increase is permanent. But if you pick up part-time work to earn extra money, you’ll typically need at least two years’ worth of tax returns that prove you’ve been earning those funds on a regular basis before your lender will count them for DTI calculation purposes.
- Add a cosigner or co-borrower. The distinction here is whether or not the other person has access to the funds you’re borrowing. If not, they’re a cosigner. If they do, they’re a co-borrower. In either case, they’re agreeing to pay back the loan if you default. Adding a cosigner or co-borrower may reduce the overall DTI ratio on your loan if they earn additional income and owe fewer debts compared to you. And, if you’re applying with a spouse or partner, you may plan to add them to the loan anyway. But be aware that if a cosigner’s DTI ratio is higher than yours (or similar), adding them to the application may not be as helpful as you’d hope.
The takeaway
Your debt-to-income ratio is a major factor that lenders consider when you apply for a mortgage. In brief, your DTI is your monthly debt obligations compared to your monthly gross income and expressed as a percentage.
Because DTI matters so much to lenders, both when reviewing your eligibility for a home loan and setting your interest rate, it’s important to understand how this measurement of your financial health can affect you as a homebuyer.
If you have time, consider working to improve your debt-to-income ratio before you apply for a mortgage. A lower DTI ratio could put you in a better position to qualify for a home loan and receive more attractive offers with lower interest rates. Plus, reducing your DTI ratio has financial benefits as well, even if you’re not planning to borrow additional money right away.
Frequently asked questions
Can I get a mortgage with a high DTI ratio?
With certain home loan programs you might technically be eligible for financing even if you have a high debt-to-income ratio. For example, it might be possible to get an FHA home loan with a DTI as high as 57%.
But, each lender sets its own guidelines. It can be difficult to find lenders that are willing to approve borrowers who have DTI ratios above a certain threshold. In general, it’s easier to qualify for a mortgage with a lower DTI ratio.
Keep in mind that even if a lender is willing to approve you for a loan with a high DTI ratio, you should examine your own budget to see how much you can comfortably afford to pay each month. If you overextend yourself financially, you could put your credit at risk and struggle to keep up with your financial obligations for years to come.
How quickly can I lower my DTI ratio?
It’s possible to reduce your debt-to-income ratio quickly using a few different strategies. For example, if you can afford to pay down debt right away it could have a speedy impact on your DTI ratio. As soon as your creditors update your credit report, your lender should be able to adjust your DTI ratio calculation. Adding a cosigner is another potentially fast way to adjust your DTI ratio.
Does my DTI affect my credit score?
Your debt-to-income ratio does not have a direct impact on your credit score. But if you pay down debt to reduce your DTI ratio, those efforts might affect your credit score as well. For example, reducing your credit card debt tends to be positive where your credit score is concerned. Paying down credit card balances usually lowers your credit utilization ratio—an action which can help your credit score.