colorful charts representing debt to income ratio

What Is Debt-to-Income Ratio?

tl;dr

What You Need To Know

  • Your debt-to-income ratio (DTI) is an important number when it comes to getting a mortgage
  • DTI measures your monthly debt against your monthly income
  • To qualify for a conventional mortgage, lenders prefer a DTI of 36% or less – but there are exceptions and government options if your DTI is higher

Contents

Thinking about buying a home and getting a mortgage to pay for it? Then you need a crash course in debt-to-income (DTI) ratio.

Lenders use your DTI to determine if you’ll be able to afford your monthly mortgage payments. That’s why knowing this powerful percentage can help you get a mortgage.

What Is Your Debt-to-Income (DTI) Ratio?

DTI is your current monthly debt (think: what you HAVE to pay for housing, any credit and/or loan payments, etc.) divided by your gross monthly income (your income before taxes and paycheck deductions).

The resulting percentage provides a concise, high-level view of your finances that takes both your income and your expenses into consideration. 

How Do You Calculate Your DTI?

Here’s how you figure out your DTI.

Gross monthly income:

Take your annual salary (before taxes and paycheck deductions) and divide it by 12.

Monthly debt obligations:

Add up all the existing debt payments you HAVE to make each month, including payments for:

  • Rent or mortgage and other fixed housing-related expenses (like utilities)
  • Auto loan or lease
  • Personal loans
  • Credit card minimums
  • Student loans
  • Miscellaneous debts (including alimony/child support payments)

Then, divide your debt by your gross monthly income and multiply by 100 to get your DTI as a percentage.

Math isn’t fun for lots of us. So we’ve hooked you up with a calculator to help you figure out your DTI.

Debt-to-Income Calculator

Itemize Debt for Most Accurate Result
Your debt-to-income ratio…

❓   Curious what your debt-to-income (DTI) ratio is? Enter your figures and let the magic begin!

🟢   On Track – Hey money maestro! You’re right on track for your house-buying journey! Make sure you have all the information you need to make the right choice.

How much can I afford?

🟢   On Track – You’re right on track for your house-buying journey!

How much can I afford?

🚨   Above Recommended DTI – Some lenders have different requirements to qualify but it’s worth looking into your credit and finding out what you can afford within your budget.

🚨   Too Much Debt – Seems like you’ve got a little too much debt to qualify with the income you’ve put in! Do you want to try again?

FYI, depending on your lender and the type of mortgage you’re getting, there may be slightly different factors used for your DTI calculation. So it’s a good idea to ask your lender how they calculate DTI.

In the meantime, the DTI equation gives you a good idea of how lenders will view your debt in relation to your income.

Examples of DTI

Let’s say your gross monthly income is $4,000, and your rent and other debts add up to $1,200. That would give you a DTI of 30%.

Maybe you make $10,000 a month. That looks great on paper, but what if $5,000 of that goes to your mortgage payment, car loan and the minimums on your credit cards? That’s a 50% DTI – and it’s potentially a signal to lenders that you may be a higher-risk borrower.

Here’s an IRL example: Kanye West earned $72 million (before taxes) over 3 years but claimed he was $53 million in debt. His finances are admittedly as complex as his lyrics, but if a lender used these numbers to calculate his DTI, it would total 74%. With a DTI that high, most lenders wouldn’t approve Yeezy for a mortgage.

What Is a Good DTI Ratio?

This table displays the DTI preferred by lenders and the maximum DTI limits for:

  • Conventional loans: limits are set by Fannie Mae or Freddie Mac
  • Federal Housing Administration (FHA) loans: limits set by the Department of Housing and Urban Development (HUD)
  • VA loans: limits set by the Department of Veterans Affairs (VA)
Loan TypePreferred by LenderMaximum Limit
Conventional Loan[1][2]36% or less45% or less
FHA Loan[3]43% or less50% or less
VA Loan[4]41% or lessNot set

Depending on the lender and your financial situation, you may be able to qualify with a higher DTI. But to do that, you’ll have to go through a more rigorous underwriting process, which means your lender will need to take a deeper dive into your finances before they can approve you.

The higher your DTI, the more cautious lenders will be about offering you a mortgage. And this could mean a less favorable interest rate on the loan.

In general, the lower your DTI, the likelier it is that lenders will consider giving you a mortgage.

If you can demonstrate that you’re a sure bet to repay your loan, lenders will be eager to offer you a competitive interest rate and may be more open to negotiating the terms of your home loan.

What Do Lenders Look at Beyond DTI?

Your DTI is an important part of the equation lenders use to decide if you qualify for a mortgage – but it’s not the only part. Lenders want to see the other pieces of your financial picture.

Credit score

Unlike DTI, a credit score doesn’t take income into account. It’s a three-digit number between 300 and 850 that measures your credit utilization ratio (the amount of money you can borrow compared to the amount you owe). 

Every lender sets their criteria for determining the weight of a credit score in their decision to lend you money and what kind of interest rate and terms they’ll offer. For lenders, a good credit score (typically 620 or higher for conventional loans) is a sign that you’ll be able to repay your loan.

Credit history

Your lender will also want to take a look at your credit history. If you have a history of making late payments, that may show up on your credit report. If you’ve been through Chapter 7 or Chapter 13 bankruptcy, that can stay on your credit report for 7 – 10 years.

Income history

Lenders will also want to know how much you’re making, how stable your employment history has been, how long you’ve been working and whether you’ve experienced long patches of unemployment. 

Steady income that goes up over time may indicate less risk, while sporadic income may be a red flag. Your lender can help assess your individual financial situation.

Down payment

Lenders are always happy if you can put more money down on a house. If you can make a down payment of 20% or more down, it can help improve your chances of qualifying even if your DTI is high.

Student Loan Debt and DTI

As student loan debt has grown, borrowers are finding that their school loans are a big portion of their DTI. This situation has made it challenging for aspiring home buyers to qualify for a mortgage even if their income and credit are good.

New FHA loan rules

If you have student loan debt and an FHA loan, new rules may help lower your DTI.[5]

Previously, lenders calculated a borrower’s monthly student loan payment as 1% of their outstanding student loan balance, even if the loans were on hold or you qualified for an income-based repayment plan. So, if you owed $30,000 in student loans, lenders would add $300 to your monthly DTI.

With the new rules, lenders use the actual amount you’re paying, which could be as little as $0 a month. That can lower your DTI and help you qualify for an FHA mortgage loan. 

What if You Have a High DTI? Empower Your Percentage

The lower your DTI percentage, the better!

If you’re concerned about your DTI, you may need to lower your percentage before you start applying for mortgages.

There are three key ways to do this:

Lower your debt

  • Cut expenses and devote more income to paying down debt
  • Aggressively pay off high-interest debt
  • Refinance or consolidate debts to lower interest rates
  • Look for student loan refinancing or income-driven repayment plans

Increase your income

Depending on your situation, try asking your boss for a raise or consider a side hustle. You may also want to see if you qualify for down payment assistance.

Consider other loan options

If your DTI is too high to qualify for a conventional loan, consider an FHA loan, or ask your loan officer or mortgage broker about other loan programs you may qualify for.

Why Keeping Your Debt-to-Income Ratio Low Is Smart

Keeping your DTI under control is a smart financial move. 

It doesn’t mean you can’t live the good life. You just have to work to keep your debt from getting out of control. Low monthly debt means more income leftover to save, occasionally splurge and – most importantly – invest for the future.

  1. Fannie Mae. “B3-6-02, Debt-to-Income Ratios (02/05/2020).” Retrieved September 2021 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-6-Liability-Assessment/1032992131/B3-6-02-Debt-to-Income-Ratios-02-05-2020.htm

  2. Freddie Mac. “Monthly debt payment-to-income ratio.” Retrieved September 2021 from https://guide.freddiemac.com/app/guide/section/5401.2

  3. U.S. Department of Housing and Urban Development. “Handbook 4000.1, FHA Single Family Housing Policy Handbook.” Retrieved September 2021 from https://www.hud.gov/sites/dfiles/OCHCO/documents/4000.1hsgh-072021.pdf

  4. U.S. Department of Veterans Affairs. “VA Guaranteed Loan.” Retrieved September 2021 from https://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf

  5. U.S. Department of Housing and Urban Development. “FEDERAL HOUSING ADMINISTRATION TAKES STEPS TO REMOVE BARRIERS TO HOMEOWNERSHIP FOR THOSE WITH STUDENT LOAN DEBT.” Retrieved September 2021 from https://www.hud.gov/press/press_releases_media_advisories/HUD_No_21_103

#icymi

In Case You Missed It

Take-aways

  1. DTI isn’t just about what you earn. Even high earners may have trouble getting a mortgage if their DTI is too high
  2. Your lender may consider your housing and non-housing debt-to-income ratios when considering you for a mortgage
  3. If your DTI is high, there are ways to lower it and qualify for a mortgage or other personal loan

You Should Also Check Out…