- Your debt-to-income ratio shows the relationship between your total monthly debt obligations and your gross monthly income—the lower it is, the better.
- Some mortgage lenders will accept a DTI as high as 50%, but the Consumer Financial Protection Bureau (CFPB) recommends aiming for 36% before shopping around for a loan.
- Calculating your DTI is as simple as dividing your gross income by your total debt, but you can also use free online calculators.
- If you find that your DTI is high, there are practical steps you can take to improve it over time.
In nearly 25 years of credit counseling and related roles, Bruce McClary has found that most consumers know what debt-to-income (DTI) ratio means. “However, some are surprised to learn its importance in the loan approval process,” says the senior vice president of communications at the National Foundation of Credit Counseling. “The area that most commonly requires explanation is how to calculate it correctly.”
Your DTI—yes, it’s the relationship between the money you have going out and the money you have coming in—needs to be a certain percentage to qualify for a mortgage, much like your credit score needs to hit a certain threshold.
McClary says you could have a healthy DTI if it’s below 40%, but the maximum percentage allowed varies by loan type.
If you’re thinking of getting a mortgage, you’ll want to make sure you know what your DTI is, and how to lower it so you can get a cheaper mortgage. Here’s what to know.
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What DTI do you need for a mortgage?
Many mortgage lenders will commonly accept a DTI up to 45%, according to McClary, who has worked as a certified credit counselor, lender and debt collector in his career. He adds that fewer companies will approve conventional loan applications with a 50% DTI.
With that said, the maximum acceptable DTI is mostly dependent on your home loan type:
|Loan type||Maximum DTI|
|Federal Housing Administration (FHA)||43%|
|U.S. Department of Agriculture (USDA)||41%|
|Department of Veteran Affairs (VA)||41% (though some VA-approved lenders go higher)|
“For the sake of affordability and a chance for an ideal interest rate, it’s a good idea to keep your debt ratio below those limits with room to spare,” McClary added.
The lower your DTI, the lower your interest rate or APR, which determines how much interest you’ll fork over to your lender.
Keep in mind that your DTI could also be viewed differently by different lenders. National bank Wells Fargo, for example, states that it categorizes DTIs into three ranges:
35% or less: Your DTI is viewed as “favorable”
36% to 49%: Your DTI has room to improve
50% or more: Your DTI may limit your loan options
For its part, the CFPB recommends that aspiring homeowners shoot for a DTI of 36% or less.
How to calculate your DTI
The simplest way to calculate your DTI is by using this basic formula:
Total monthly debt payments / total monthly income
To ensure the accuracy of your DTI calculation, follow these steps:
Add up your debt and payment obligations: List out your minimum monthly payment for all of your outstanding accounts, from credit cards to student and auto loans. Though you shouldn’t include recurring non-debt payments, such as for utilities, you should include any legally-binding dues, such as for child support.
Divide your total monthly debt by your gross income: Use your salary or wages before taxes and standard deductions are taken out, like for health insurance. You might pull up your latest paystub or ask your employer’s human resources representative to find this number.
Example of a debt-to-income calculation Each month, Sandy has a gross income of $6,000. She also has monthly debt payments: $500 for a student loan, $750 for a car loan and $1,200 for prospective housing expenses (her mortgage lender is weighing whether to approve her loan application). Dividing her total debt payments ($2,500) by her gross income, she has a DTI of 42%. Mathematically, the formula looks like this: (500+750+1250) / (6000) = 0.42 To get the DTI in percentage form (42%), simply multiply the formula’s output (0.42) by 100.
The DTI you’re calculating can be referred to as your “back-end” DTI, but you may also run into the term “front-end” DTI. What’s the difference?
|Type of DTI||Definition|
|Back-end||Lenders include would-be housing expenses right alongside your existing debt balances (as found on your credit reports) to create this more holistic view of your DTI.|
|Front-end||Mortgage lenders use this “mortgage DTI” to account only for your prospective housing expenses, including recurring home-purchase costs like homeowners insurance and property taxes.|
Mortgage lenders consider both of your DTIs. Your back-end DTI—the number you should calculate— gives loan officers a more complete view of your cash-flow. Your front-end DTI, on the other hand, is specific to your potential housing costs. If your front-end DTI is too high after inputting your prospective monthly mortgage payment, it could be that you're pursuing a home purchase beyond your current means.
If you want to avoid division and multiplication entirely, there are free and easy-to-use debt-to-income ratio calculators across the web, such as Wells Fargo’s. Just be sure the tool you use asks for all of the inputs (debt and income) and pumps out the type of DTI you’re seeking.
What to do if your DTI isn’t good enough
If you calculate your DTI—or receive a home loan rejection because of it—don’t worry that your dreams of buying a home are permanently dashed. There are surefire ways to improve your DTI to qualify for a mortgage, or for one at a lower APR. You may have to give it some time, however, and put in some effort. Here are four things you can do:
1. Pause your mortgage application
There are two levers to pull your DTI in the right direction: debt and income. And of course, decreasing your debt and increasing your income is hard to accomplish overnight. So, you might postpone your search for a home loan until your DTI is nudged in the right direction.
2. Pay off debt and limit your spending
Now, for the first lever of your DTI: the debt that’s weighing you down.
“Look for ways to affordably accelerate debt repayment and start making a plan to reach your target DTI,” says the NFCC’s McClary. “You can adjust your budget to pay more than the minimum payments, but that may take some time to get you to the results you seek.”
You might trim unnecessary expenses from your monthly budget, for example, to pay down credit card or other debt at a faster pace. Minimizing your current spending will also allow you to avoid taking on additional debt.
More tips from McClary
If you’re doing well financially, consider using savings or liquidating assets to lower your debt balances.
If you’re delinquent on debt, contact a NFCC-approved nonprofit credit counseling agency to get your accounts current and get an affordable repayment plan.
3. Increase your income
It’s easier said than done, of course, but increasing your income can help you pay down debt faster—and also signal to mortgage companies that you’ll have more money coming in each month to afford your home loan.
To increase your income and improve your DTI in the short-term, consider the following strategies:
Ask for and negotiate a raise at work, referencing your achievements and calling on colleagues to brag on your behalf.
Seek a promotion or more hours at your current position, or take on a part-time job or side hustle.
Start income streams from what stuff you own, whether it’s to sell unused stuff or something you make (like photographs) or renting out a spare room, car or parking space.
4. Add a co-borrower or cosigner to your application
If you’re buying a home as an individual, taking the steps above will help you improve your DTI and mortgage loan application. However, there could be a shortcut if you’re home shopping with a partner or cosigner:
If you have a partner or spouse: Mortgage lenders will add up your combined debt and income to come up with a consolidated DTI, so your high DTI as an individual could be lower as a couple.
If you have a cosigner: Whereas your partner might be your co-borrower, a cosigner with a good DTI could go to bat for you on your mortgage application (whether or not they plan to live in the house with you). Just be sure that you and your potential cosigner understand that they will be held legally responsible for repaying the loan if you aren’t able to stay current on your own.