What is a debt-to-income ratio?
Definition of DTI
Your DTI ratio compares how much you earn each month to how much you owe in debt. Lenders use it to gauge how easily you can afford a mortgage and how likely you are to pay them back on time and in full. Some lenders also look at your front-end DTI—also called the front-end ratio—which only includes housing-related debt like your monthly mortgage or monthly housing costs. In contrast, your back-end DTI ratio includes all monthly debt obligations, such as credit card payments, car loans, student loans and housing costs, giving lenders a more complete picture of your overall financial burden.
Why it matters when buying a home
Your DTI ratio helps lenders determine if you qualify for a mortgage and what kind of loan terms you’ll get. There’s no “perfect” DTI ratio since requirements vary by loan type. Conventional loans tend to be stricter, but options like FHA and USDA loans typically have more flexible guidelines. A lower DTI can also help you qualify for a better interest rate, which boosts your overall home affordability. To sum it up, the lower your DTI, the better.
How to calculate DTI
What counts as monthly debt
When using a DTI ratio calculator, you want to include all loan payments and recurring debts. These include monthly debt obligations like credit cards, personal loans, car loans, student loans and any other recurring payments. Don’t forget to factor in child support, minimum payment amounts on credit cards and your monthly mortgage. Skip everyday expenses like utilities or groceries or subscriptions; they don’t contribute to your DTI. Be sure to calculate your DTI using your income before taxes, since lenders evaluate your ability to repay based on your gross monthly income.
What counts as gross income
Gross income is the amount you earn before taxes and other deductions. Add up your wages, salaries, bonuses and any other sources of income, like earnings from freelance work or a side hustle.
Debt-to-income formula
Don’t worry—the calculator does the math for you. But it’s still helpful to know how to calculate debt-to-income ratio: just divide your total monthly debt payments by your gross monthly income, then multiply by 100 to get a percentage.
Calculating debt-to-income ratio
Let’s say your total monthly debt adds up to $1,500 between rent, student loans and car payments. If you make $60,000 a year, that’s $5,000 in gross monthly income. Divide $1,500 by $5,000, and you get 0.30. That means 30% of your income goes toward paying off debt.
Using the DTI calculator
Enter your gross monthly income
Enter your total gross monthly income or have the calculator tally it up from multiple sources, like your wages, bonuses and any side gigs.
Enter your monthly debts
You can enter your total monthly debt or break it down by individual debt payments—just be sure to account for all recurring debts. This means credit card payments, car loans, student loans and any other fixed monthly debt payments.
When a lender is looking at your DTI, they will include your future anticipated housing payment which includes the mortgage, taxes, insurance and HOA fees. If you know what your anticipated housing expenses will be, it's a good idea to include them in your DTI calculations.
PRO TIP
Use our Affordability Calculator to estimate your anticipated house payment.
Calculate your ratio
Once your info is in, hit calculate and watch the magic happen. You can also use the calculator to play with different scenarios—like paying off a loan or adding new debt—to see how your DTI ratio might change.
Understanding your DTI score
What is a good debt-to-income ratio?
Generally, a ratio of 35% or lower is considered healthy. It signals to lenders that you likely have enough room in your budget to take on a mortgage. Ratios between 36% and 43% are still considered acceptable, though they might not get you the lowest interest rate.Keep in mind that DTI requirements vary by loan type, so even a higher ratio may still qualify. If you’re a first-time home buyer, special loans and programs can help you get approved even when your DTI ratio is on the higher end.
What’s considered too high?
A DTI ratio above 43% can make it tricker to qualify for a mortgage. Lenders may think your budget is already stretched too far. If you find yourself in the high range, don’t panic—we’ll look at ways to improve your DTI ratio in a bit.
How lenders evaluate DTI
When lenders look at your DTI ratio, they’re basically asking: can this person afford to take on a mortgage along with their current debts? A lower DTI suggests you’re less of a risk and more likely to repay what you borrow. A higher DTI ratio could limit your loan options or lead to higher borrowing costs.
Why DTI matters for mortgage approval
Your DTI ratio doesn’t just affect your loan eligibility; it can also influence the amount you’re approved for and the interest rate you receive.
Loan type requirements
| Loan Type | Typical Maximum DTI | Description |
|---|---|---|
| Conventional | 36% - 43% | 43% max for Qualified Mortgages; up to 50% possible with strong financials |
| FHA | Up to 57% | Allows higher DTIs with compensating factors like good credit or a large down payment |
| VA | Up to 60% in some cases | Flexible guidelines; also uses a residual income test to assess affordability |
| USDA | 41% | Stricter guidelines, although exceptions may be granted based on household size and region |
DTI and interest rates
Lenders tend to reserve their best interest rates for borrowers with lower DTI ratios. That’s because a lower DTI ratio suggests financial stability and a higher likelihood of repayment. If your ratio is higher, you may still qualify, but your interest rate could be less favorable, which means paying more over the life of your loan.
Preapproval considerations
If you’re planning to get preapproved—which is more formal than mortgage prequalification—before you narrow down the home search, your DTI ratio will play a big role. During the mortgage preapproval process, you submit your financial stats, including your credit score, DTI ratio, proof of income and proof of assets. An underwriter reviews your loan request and offers a specific loan amount that you are likely to be approved for. If you’re hoping to be approved for a larger loan amount, get your DTI ratio in a good place before applying.
PRO TIP
Get preapproved before you hit the open houses
Getting preapproved shows sellers you’re a serious buyer and gives you a competitive edge when it’s time to make an offer. When you’re ready, Citi SureStart® Pre-Approval gives you a clear picture of your purchasing power and comes with a strong commitment to lend.
Ways to improve your DTI ratio
Pay down existing debt
If you’re in a position to reduce debt payments, focus on paying high-interest debts first. This reduces the amount you spend on borrowing costs. You might also consider refinancing or consolidating loans to lower your monthly payments and simplify your finances.
Avoid taking on new loans
Now is not the time to apply for new credit cards, car loans or other large debts. New loans can raise your DTI ratio and trigger hard credit inquiries, which may impact your credit score.
Increase your income
Adding a new income stream, like a side hustle or part-time job, can sway the DTI ratio in your favor by beefing up your monthly income and lowering the percentage that goes to debt.
DTI improvement checklist
- Pay down your debts: Focus on reducing high-interest monthly debt
- Refinance or consolidate loans: Refinance to consolidate your debts into one payment with a lower rate
- Increase your income: Check out part-time jobs or freelance opportunities
- Avoid new debt: Hold off on new loans or large purchases that can spike monthly debts or impact credit score
- Review monthly budget: See if you can trim any fat from your expenses
- Make extra payments: Pay more than the minimum toward existing debts to save on interest