Your debt-to-income ratio plays a large role in whether you’re able to qualify for a mortgage. Known in the mortgage industry as a DTI, it reflects the percentage of your monthly income that goes toward debt payments and helps both you and lenders determine how much house you can afford. To lenders, it’s just as important as your credit score and job stability.
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, although there are exceptions when the ratio can be higher.
Your DTI ratio doesn’t tell the whole story: It leaves out unavoidable monthly expenses such as food, utilities, transportation costs and health insurance. Keep these costs in mind as you evaluate your ability to afford a home.