Understanding Debt-to-Income Ratio for a Mortgage

Your debt-to-income ratio, or DTI, plays a large role in whether you’re ready and able to qualify for a mortgage. It's the percentage of your income that goes toward paying your monthly debts, and it helps lenders decide how much you can borrow. DTI is as important as your credit score and job stability, if not more so.

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Calculate your DTI

How debt-to-income ratio is calculated

Lenders calculate your debt-to-income ratio by dividing your monthly debt obligations by your pretax, or gross, income. Most lenders look for a ratio of 36% or less, though there are exceptions, which we’ll get into below.

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Debt-to-income ratio is calculated by dividing your monthly debts by your pretax income.”

DTI sometimes leaves out monthly expenses such as food, utilities, transportation costs and health insurance, among others; lenders may not consider these expenses and may approve you to borrow more than you’re comfortable paying. So keep these additional obligations in mind as you evaluate how much you’re willing to pay each month.

You’ll want the lowest DTI possible not just to qualify with the best mortgage lenders and buy the home you want, but also to ensure you’re able to pay your debts and live comfortably at the same time.

» MORE: 5 tips for finding the best mortgage lenders

Types of debt-to-income ratios

Also known as a household ratio, front-end DTI is the dollar amount of your home-related expenses — your future monthly mortgage payment, property taxes, insurance and homeowners association fees — divided by your monthly gross income.

Your back-end DTI includes all the other debts you pay each month — such as credit cards, student loans, personal loans and car loans — in addition to home-related expenses. Back-end ratios tend to be slightly higher, since they take into account all of your monthly debt obligations.

While mortgage lenders typically look at both types of DTI, the back-end ratio often holds more sway because it takes into account your entire debt load.

Lenders tend to focus on the back-end ratio for conventional mortgages — loans that are offered by banks or online mortgage lenders rather than through government-backed programs. If your front-end DTI is below 28%, that’s great. If your back-end DTI is below 36%, that’s even better.

When you're applying for government-backed mortgages, like an FHA loan, lenders will look at both ratios and may consider DTIs that are higher than those required for a conventional mortgage: up to 50% for the back-end ratio.

Ideally, though, you’ll want to keep your DTIs as low as possible, regardless of lenders’ limits. A lower DTI will help your credit score, which will help you to get a lower mortgage interest rate.

» MORE: How to get the best mortgage rates

» MORE: See the best lenders for low credit score borrowers

DTI isn't a full measure of affordability

Although DTIs are important when getting a mortgage, they’re not enough when it comes to helping you figure out what you can afford, says Ira Rheingold, executive director of the National Association of Consumer Advocates.

“You can have these general guidelines around debt-to-income ratio,” he says, “but the bigger question is, will you, once you have that mortgage payment, have sufficient money to make ends meet?”

Since DTIs don't take into account expenses such as food, health insurance, utilities, gas and entertainment, you’ll want to budget beyond what your DTI labels as “affordable” for you. Aiming below the 36% back-end target is ideal.

This is especially important since DTIs count your income before taxes, not what you actually take home each month.

» MORE: How much house can you afford?

How to lower your DTI

The higher your DTI, the more likely you are to struggle with qualifying for a mortgage and making your monthly mortgage payments.

There are several ways to lower your debt-to-income ratio:

Avoid taking on more debt.
Don’t make any big purchases on credit before you buy a home.
Try to pay off as much of your current debt as possible before you apply for a mortgage.

» MORE: Get help lowering your DTI

While a pay raise at work is another way to lower your DTI, it may not be possible to get one quickly. That’s why it’s better to avoid taking on more debt and work on whittling down the debt you have.

In most cases, lenders won’t include installment debts like car or student loan payments as part of your DTI if you have just a few months left to pay them off.

If your DTI is high, don't apply yet

If your debt-to-income ratio is exceptionally high — say 50% or more — you probably should wait to make a home purchase.

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The best way to lower your DTI is to whittle down the debt you have and avoid taking on more.”

“There's nothing wrong with saying, 'I need to wait another year before I buy a house,'” Rheingold says. He suggests getting your finances in order so that you present yourself as someone with good credit and not a lot of debt.

Before you sit down with a lender, using a mortgage calculator is one way to figure out a reasonable mortgage payment for you.

The lower your debt-to-income ratio, the safer you are to lenders — and the better your finances will be.