What is Debt-to-Income Ratio?
Your debt-to-income ratio (DTI) compares your monthly debt payments to your gross monthly income. Lenders use DTI to evaluate your ability to manage monthly payments and repay debts. It's one of the most important factors in loan approval decisions.
A lower DTI indicates you have a good balance between debt and income, making you a more attractive borrower.
Two Types of DTI
Front-End DTI (Housing Ratio)
Measures only your housing costs (mortgage/rent, property taxes, insurance, HOA) relative to income.
Formula: Monthly Housing Costs ÷ Gross Monthly Income × 100
Guideline: Should be 28% or less for conventional loans.
Back-End DTI (Total Debt Ratio)
Includes ALL monthly debt obligations: housing, car loans, student loans, credit card minimums, personal loans, alimony, child support.
Formula: Total Monthly Debts ÷ Gross Monthly Income × 100
Guideline: Should be 36% or less, though many lenders accept up to 43%.
DTI Thresholds by Loan Type
| Loan Type | Max Front-End | Max Back-End | Notes |
|---|---|---|---|
| Conventional | 28% | 36-43% | Stricter requirements |
| FHA | 31% | 43% | More flexible |
| VA | N/A | 41% | No front-end limit |
| USDA | 29% | 41% | For rural properties |
| Jumbo | 25-28% | 38-43% | Varies by lender |
Higher DTI Possible
What's a Good DTI?
| DTI Range | Rating | What It Means |
|---|---|---|
| 0-28% | Excellent | Strong financial position, easy loan approval |
| 28-36% | Good | Healthy balance, most loans accessible |
| 36-43% | Fair | Acceptable for most loans, some limitations |
| 43-50% | High | Limited options, higher rates likely |
| 50%+ | Very High | Difficult to qualify, focus on debt reduction |
What Counts as Debt?
Included in DTI
- Mortgage or rent payment
- Property taxes and insurance (if escrowed)
- HOA fees
- Car loans and leases
- Student loans (even if deferred)
- Credit card minimum payments
- Personal loans
- Alimony and child support
- Other installment debts
NOT Included in DTI
- Utilities (electric, gas, water, internet)
- Cell phone bills
- Insurance (car, health, life)
- Groceries and food
- Subscriptions
- Entertainment
- Savings contributions
How to Calculate Your DTI
- Add up all monthly debt payments (mortgage, car, loans, credit card minimums)
- Determine your gross monthly income (before taxes)
- Divide total debt by gross income
- Multiply by 100 to get percentage
Example:
Monthly debts: $1,500 (mortgage) + $400 (car) + $250 (student loans) + $100 (credit cards) = $2,250
Gross monthly income: $6,500
DTI: $2,250 ÷ $6,500 × 100 = 34.6%
How to Improve Your DTI
Reduce Debt
- Pay off credit cards (reduces minimum payments)
- Pay off car loan if near end of term
- Refinance loans to lower payments
- Avoid taking on new debt
Increase Income
- Ask for a raise
- Take on a side job
- Add documented rental income
- Include spouse's income (if applying jointly)
Quick Wins
Don't Hide Debt
DTI vs Credit Score
Both matter, but differently:
| Factor | DTI | Credit Score |
|---|---|---|
| What it measures | Monthly debt burden | Credit history/behavior |
| Affects | How much you can borrow | Interest rate you get |
| How to improve | Pay off debt, increase income | Pay on time, lower utilization |
| Time to improve | Immediately (pay off debt) | Months to years |
Frequently Asked Questions
Q: Does rent count if I'm buying a house?
A: No. When calculating DTI for a mortgage, lenders use your proposed new housing payment, not your current rent. They want to see if you can afford the new loan.
Q: How do deferred student loans affect DTI?
A: Even deferred loans count! Lenders typically use either 1% of the balance or the calculated payment under a standard repayment plan.
Q: Should I pay off debt or save for down payment?
A: It depends on your DTI. If you're above 43%, paying down debt should be priority. If DTI is under 36%, you can balance both. The down payment threshold (20%) also matters for PMI.
Q: Can I include bonus income?
A: Yes, if you can document 2+ years of consistent bonuses. Lenders typically use an average. First-year employees may not be able to count bonus income.
Q: What if my spouse has high debt but isn't on the loan?
A: In most cases, only the applicant's debt counts. However, in community property states, spouse's debt may be considered even if not on the loan.
Q: How fast can I lower my DTI?
A: Immediately! Paying off a credit card or car loan instantly lowers DTI. That's why some buyers pay off debts right before applying for a mortgage.
DTI Calculator Tips
- Use gross (pre-tax) income, not take-home pay
- Include all minimum payments, even for cards you pay in full
- Don't forget HOA fees, property tax, and insurance in housing costs
- Test different scenarios by adjusting proposed new debt
- Check both front-end and back-end ratios
This calculator provides estimates. Lenders may use different calculation methods and have varying requirements. Consult with a mortgage professional for official pre-approval.