What is a debt-to-income ratio for a mortgage?

When you apply for a mortgage, your lender will review your debt-to-income ratio (DTI). This figure compares how much money you owe (your debts) to how much money you earn (your income). If you have a high DTI ratio, the lender may decide you shouldn’t take on additional debt, while if you have a low one, you’re more likely to be approved.

Before applying for a home loan, it’s just as important to know your DTI ratio — and how it stacks up to what lenders require — as it is to check your credit score.

What is a debt-to-income ratio?

Your debt-to-income ratio measures the portion of your gross (pre-tax) monthly income spent on repaying regularly occurring debts, including mortgage payments, rents, outstanding credit card balances and payments on other loans. It’s expressed as a percentage.

Types of DTI ratios

Lenders typically focus on two kinds of DTI ratios.

• Front-end ratio: Also called the housing ratio or mortgage-to-income ratio, this shows what percentage of your income would go toward housing expenses if you were approved for your mortgage. It includes your monthly mortgage payment (principal and interest) and any payments you make into your escrow account toward property taxes and homeowners insurance premiums, as well as mortgage insurance and homeowners association fees, if applicable.
• Back-end ratio: This shows how much of your income is required to pay all monthly debt obligations. This includes the potential mortgage, plus payments on credit cards, auto loans, student loans and child support — the predictable, regularly recurring items. Living expenses, such as groceries and utilities, are not included.

What is a good debt-to-income ratio?

It probably goes without saying: Lower is better. Lenders generally look for the ideal candidate’s front-end ratio to be no more than 28 percent and the back-end ratio to be no higher than 36 percent. They then work backward to figure out how much of a mortgage loan and monthly payment you can afford.

That said, lenders do approve borrowers with higher DTIs. Most conventional loans allow for a DTI ratio of no more than 45 percent, but some lenders will accept ratios as high as 50 percent if the borrower has compensating factors, such as a savings account with a balance equal to six months’ worth of housing expenses.

Having a lower DTI ratio doesn’t just make it easier to get approved for a mortgage. It can also help you get a better interest rate and, as a result, save you money over the life of your loan.

Why does your debt-to-income ratio matter to lenders?

Lenders assess your DTI ratio to determine if you can comfortably afford to make monthly mortgage payments. A solid credit score, stable earnings and exceptional payment history are important. But if your monthly debt repayments already eat up a lot of your income, a mortgage lender might think it’s too risky to extend you financing.

How to calculate your debt-to-income ratio

Follow these steps to calculate your back-end DTI ratio before applying for a mortgage:

1. Add up your monthly debt payments: Factor in all your debt obligations, including payments toward your rent or mortgage, personal loans, auto loans, child support or alimony, student loans and credit cards. If you’re applying with someone else, combine your monthly debts. Don’t include other monthly expenses like food and utilities.
2. Divide your debts by your monthly gross income: Next, divide your debt payments by your pre-tax monthly income. Again, make sure you’re using the combined debts and income of all mortgage applicants.
3. Convert the figure into a percentage: The final step is to convert your DTI ratio from a decimal to a percentage by multiplying it by 100.

Debt-to-income ratio examples

Let’s say your monthly gross income is $6,000. Your monthly rent comes to $1,800. Each month you also pay $500 toward your car loan, $150 toward your student loans and $200 toward credit card bills.

To calculate your front-end ratio, add up your monthly housing expenses only, divide that by your gross monthly income, then multiply the result by 100. It comes to 30 percent:

$1,800 ➗ $6,000 X 100 = 30%

To determine your back-end ratio, add up all your monthly debt payments — that totals $2,650. Then, divide the result by your monthly gross income and convert it into a percentage. It comes to 44 percent:

$2,650 ➗ $6,000 X 100 = 44%

Calculating the ideal DTI

Now let’s work backward to find the ideal mortgage payment, using the income and debt examples above.

If you’ve got $6,000 in gross monthly income, and you want your front-end DTI ratio to be 28 percent, your maximum monthly mortgage payment would be $1,680.

$6,000 x 0.28 = $1,680

For the 36 percent back-end ratio, your maximum for all debt payments should come to no more than $2,160 per month.

$6,000 x 0.36 = $2,160

These would be the ideal figures in terms of DTI for mortgage applications. In a real-life scenario, lenders may accept higher ratios. It depends on your credit score, your savings and other liquid assets and the size of your down payment.

Debt-to-income ratio requirements by loan type

The type of mortgage you want affects the DTI parameters. The range isn’t huge, and a lot is at the individual lender’s discretion, but different loans tend to have different thresholds.

How to lower your debt-to-income ratio

Lowering your DTI ratio before applying for a mortgage can help you get approved at more favorable loan terms. While it takes some time, it’s worth trying to lower your ratio if you’re considering buying a home.

“The best place to start is reducing debt. There are multiple ways to go about this, including paying off high-interest loans, making extra payments and consolidating debt,” says Matthew Sanford, assistant vice president of mortgage lending at Skyla Federal Credit Union in Charlotte, North Carolina.

“Implementing strategic methods like debt snowball — paying off small debts first — or debt avalanche, focusing on high-interest debt, will help borrowers lower their obligations and improve their financial standing before applying for a mortgage,” he adds.

Here are some other ways to get a better debt-to-income ratio:

• Refinance existing loans: If rates are lower now than when you first took out these loans, refinancing can lower your monthly payment.
• Pay off high-interest loans: More expensive loans have more weight in your DTI calculation, so paying them off first will improve the ratio. Consider opening a balance transfer credit card to reduce interest and pay off your debt faster. You may also consider a debt consolidation loan, which has the advantage of a fixed interest rate.
• Get a co-signer: If someone with sufficient income and good credit — better than yours, preferably — is willing to sign onto the loan with you, it’ll boost your candidacy. With conventional loans, the co-signer often has to reside in the house. FHA loans don’t carry that requirement.
• Seek out additional income: If you’re able to earn more, it will help improve your DTI ratio. Consider picking up a second job or starting a side hustle, like driving for a rideshare service, to make some extra cash.
• Look into loan forgiveness: These types of programs may eliminate some of your debt entirely. However, it’s important to weigh the pros and cons. While you’ll get out of debt faster, loan forgiveness programs can have a negative impact on your credit score, and you may owe taxes on the amount forgiven. Consider talking with a lawyer before signing up for a program.

How quickly can I improve my DTI ratio?

If you can boost your income or have cash reserves that you can use to pay off debt, you could improve your mortgage debt-to-income ratio quickly. But realistically, if you’re saving for a home, you can’t afford to put all your savings toward paying off existing debt, so you’ll want to take a slow, steady approach over weeks or months. It will probably take at least a month or two for any changes to be reflected in your credit history and a billing cycle or two for a significant change to register on your credit score.

FAQ

• Can I get a mortgage with a high DTI?

  It can be possible to get a mortgage, even with a higher-than-ideal debt-to-income ratio. However, it will depend on the type of loan you’re applying for and how high your DTI is. FHA loans and VA loans typically allow for higher DTI ratios— provided those applicants show a strong credit history and financial reserves. Being able to make a large down payment helps, too.

• Does DTI impact my credit score?

  Your debt-to-income ratio doesn’t directly shape your credit score because your credit report does not include information about your income. However, your total amount of debt does play a role in determining your credit score, especially in terms of your credit utilization ratio, or how close to your credit card limits your balances are. If you improve your DTI by paying off various obligations, it will help improve your credit score, too.

• What are the limitations of the debt-to-income ratio?

  When applying for a mortgage, the debt-to-income ratio is certainly important, but it’s just one of many factors that lenders consider when reviewing your mortgage application. They’ll also look at your credit score, employment record and down payment size.