When it comes to getting approved for a mortgage, your debt-to-income ratio carries serious weight. In fact, according to a NerdWallet study, a high DTI ratio was the #1 reason lenders denied mortgage applications in 2022. Let’s break it down!
Your debt-to-income ratio (DTI) is a number lenders look at to see how much of your monthly income goes toward debt. It’s found using a simple formula—the lower your DTI, the better your chances of getting approved for a home loan. Here’s the formula:
Say you make $7,000 before taxes each month. You owe $350 for your car loan, $250 for student loans, $200 on credit cards, and you’re planning on a mortgage payment of $1,800.
Your total debt = $2,600
Your income = $7,000
Your DTI = ($2,600 ÷ $7,000) x 100 = 37%
That would be your back-end DTI, and this example is just barely within the typical range for most lenders.
There are two types of DTI ratios lenders care about:
This includes your expected housing costs (mortgage, property taxes, homeowners' insurance, and mortgage insurance) divided by your gross monthly income. Most lenders like to see this under 28%.
What Is a Back-End DTI Ratio?
This includes all your monthly debts (credit cards, car loans, student loans, and your future mortgage payments). The number to aim for here is below 36%, though some loans allow up to 50% if you meet other criteria. Think of back-end DTI as the "big picture" of your finances.
Lenders use your debt-to-income ratio to gauge risk. If too much of your income is already going toward debt, it raises a red flag. You might be more likely to fall behind on payments if something unexpected comes up.
Missed payments can lead to foreclosure, which is a risk lenders want to avoid. Even if the numbers technically work, lenders want to be confident that your mortgage won’t stretch you too thin.
Here’s a quick breakdown by loan type:
Note: Just because you can get approved with a high DTI ratio doesn’t mean you should. Lower is better, both for approval odds and your ability to pay back your mortgage.
We will be using that formula from earlier, dividing your monthly debt payments by your monthly income and multiplying it by 100. Here's what each of those values should include:
Your Monthly Debts:
Your Monthly Gross Income:
This is your income before taxes. Including:
Then plug it into the formula, multiply by 100, and you’ve got your percentage.
If your DTI is pushing the limits, don’t panic. Just like your credit score, your DTI ratio can be improved over time. Here are a few ways you can lower your DTI ratio.
Knocking out even one monthly payment can make a big difference. If you’re close to paying off your car or a credit card, it might be worth wrapping that up before applying.
Now’s not the time to buy a new couch on credit or take out a new loan. Keep your finances steady until the homebuying process is complete.
Easier said than done, but even picking up a side hustle or freelance work can help tip the ratio in your favor.
If your DTI is over 50%, it might be smart to wait a bit before applying for a mortgage. Use the time to build a stronger financial foundation.
Your DTI gives lenders a snapshot of how comfortably you can afford a new home. And while lenders may have their own limits, the real goal is making sure you’re making a smart decision for your financial future.
So, before you fall in love with that dream home, crunch the numbers. If your DTI could use some work, take the time to fix it. Want help figuring out your DTI or prepping for a mortgage? Click here to connect with a Home Loan Specialist.
Check our FAQs for responses to our most popular questions about debt-to-income ratio.