What is DTI?
Your DTI is a simple way to compare the amount of money you owe each month with the amount you earn. Calculating your DTI is actually pretty easy; you just add all your monthly debt payments and divide that by your monthly gross income. Your monthly gross income is the amount you earn each month before taxes and other deductions are taken out. You can typically find your gross pay on your pay stub.
So, say you make $5,000 per month, you have a $300 car payment, and your rent is $1,200. Your DTI would be $1,500 / $5,000, or 30%.
Now, let’s dive deeper. There are two different types of DTI ratios that mortgage lenders look at when you apply for a home loan: front-end and back-end. While it’s helpful to know both types of DTI, the back-end ratio is what will give lenders the best idea of how much house you can afford.
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Front-end DTI ratio
First up is the front-end ratio. This number is all about housing expenses, so it includes your monthly mortgage or rent payment, property taxes, homeowners insurance and any homeowners association fees. Once you’ve tallied that up, the total gets divided by your gross monthly income.
You may notice that, if you’re renting, you probably don’t have some of these numbers. Lenders often use estimates based on expected costs to get a sense of whether you can afford a certain monthly payment.
Back-end DTI ratio
The other important number is your back-end ratio, which provides a broader picture of your monthly debts compared with how much you earn. It factors in everything that shows up on your credit report, including those same front-end housing costs, plus other bills like credit card payments, auto loans and student loans. When you’ve got that number, it gets divided by—you guessed it—your gross monthly income.
Why your DTI ratio matters
When you submit a mortgage application, lenders look at your DTI to make sure you’re financially stable and to see how much more debt you can take on while still making your monthly payments. The lower your DTI, the better your chances are of getting approved and locking in a better interest rate because it suggests that less of your income is already going toward debt. A higher DTI, however, means you’ll be less likely to qualify.
What is a good mortgage loan DTI?
Really, it depends on the lender. To be eligible for the lender’s best interest rates, you may need a DTI lower than 36%. Many lenders will approve loans with a DTI up to 43%, though. If you have other assets, like a substantial amount in savings, some lenders will even consider a DTI of up to 50%.
Just remember, your DTI is only one part of the picture. Things like loan type, down payment and credit score are also in the mix, so there isn’t a single perfect DTI for buying a house.
How to calculate your DTI ratio
Figuring out your DTI ratio can help you know what to expect when you apply for a home loan. If you’re applying with your spouse or partner, their debts and income will get factored into the number, too.
- Add it all up: Add up all of your debts, including mortgage payment or rent (or expected mortgage payment), car loans, student loans and any credit card payments, plus other monthly costs like child support or alimony. Don’t worry about living expenses like groceries and utilities.
- Divide monthly payments by gross income: Now, take that total and divide it by your gross monthly income—that’s the amount you earn before taxes and other deductions. Your result will come out as a decimal figure.
- Convert the result to a percentage: You’re looking for a percentage, so multiply the decimal by 100 to get your DTI.
If you want to estimate how much your DTI might be after getting a mortgage, use our Monthly Payment Calculator.
DTI in action
The earlier example was very basic and was meant to give you a sense of how DTI works. Now, let’s look at a more detailed example to better understand how the DTI ratio works when applying for a mortgage. We’ll use some of the same numbers.
Emily is a graphic designer who earns $5,000 a month and is interested in buying a home. She needs to calculate her DTI to determine if she qualifies for a home loan.
Here’s how it breaks down:
Monthly debts
| Debt Type | Amount |
|---|---|
Car loan | $300 |
Student loan | $150 |
Credit card payments | $100 |
Proposed mortgage payments | $1,200 |
Total monthly debts | $1,750 |
So, with the above debts in mind, Emily can now calculate her DTI using the following formula:
DTI = (Total Monthly Debts / Monthly Gross Income) x 100
Emily’s DTI calculation would be ($1,750 / $5,000) x 100, which equals 35%.
Emily’s back-end DTI of 35% is within the acceptable range for most lenders, indicating she is likely to qualify for the mortgage.
DTI ratio requirements by loan type
When you’re in the market for a mortgage, your DTI is a pretty big deal, and each loan type has its own requirements. Keep in mind, lenders will look at your DTI within the context of your full financial profile, so there might be wiggle room if your DTI isn’t as low as you’d like.
FHA loans
FHA loans can be helpful for first-time buyers and offer a little more grace when it comes to DTI. Less than 43% is ideal, but exceptions can be made.
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For an FHA Loan it's best to have: Less than 43% DTI / Greater than 500 credit score
VA loans
Designed for active-duty service members, eligible veterans and their qualifying families, VA loans may accept a ratio of up to 60% (though less than 41% is preferred) and don’t require a down payment.
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For a VA loan, it’s best to have: Less than 41% DTI / Greater than 620 credit score
Conventional loans
While there’s no set requirement for conventional loans, a DTI of under 36% is your best bet for getting approved. If you have a good bit of savings or other forms of financial security, you might be able to get away with about 43%.
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For a conventional loan it's best to have: Less than 36% DTI / Greater than 620 credit score
Ways to lower your DTI
Worried about having a high DTI? Improving your ratio can take time and some serious discipline, but you do have options. By keeping a close eye on your debt and income each month, you can push your ratio in the right direction and boost your chances of scoring loan terms that work in your favor. Here are some tips to help lower your DTI for a mortgage:
Tackle smaller debts first
Paying off existing debt is the fastest way to lower your DTI, and starting small can be a smart strategy. If it’s not in your budget to pay off a debt in full, simply making a little more than your minimum payment each month can also help.
Consider a debt consolidation mortgage refinance
This involves refinancing your existing mortgage into a new one that includes your other debts. It can potentially lower your overall monthly payments and consolidate multiple debts into one, making it easier to manage and possibly reducing your DTI. Just be sure to review the terms carefully to ensure this move makes financial sense in the long run.
Boost your income
That promotion you’ve been eyeing? Now’s the time to go for it! Thinking about starting a side hustle? Get after it!
Increasing your earnings, whether it’s by moving up at your current job, taking on a part-time gig or freelancing, can really help lower your DTI for a home loan.
Add a co-borrower
Buying a home with your spouse or partner? If they have a low DTI, adding them to the loan could lower your total household ratio and increase your chances of getting approved.
Add a mortgage co-signer
It might be time to phone a friend or family member. If someone you trust will co-sign your mortgage loan, their income and debts will also count toward your DTI. Unlike a co-borrower, a co-signer won’t have an ownership interest in the property.
