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.
How we got here
Mortgage approval: What’s behind the numbers in our DTI calculator?
Your debt-to-income ratio matters when buying a house. It’s one way lenders decide how much mortgage you can handle and how likely you are to pay back the loan. DTI is calculated by dividing your monthly debt obligations by your pretax, or gross, income.
In most cases, lenders want total debts to account for 36% of your monthly income or less. Nonconventional mortgages, like FHA loans, may accept higher a DTI ratio, but conventional mortgages may not be as flexible.
Lenders consider low DTI as important as having a stable job and a good credit score. When evaluating your mortgage application, DTI tells lenders how much of your income is already spoken for by other debts. If the percentage is too large, it’s a clue you may have trouble paying your monthly mortgage payments, and lenders will be reluctant to approve your loan.
Hate surprises? Estimating your DTI with the NerdWallet calculator before submitting your mortgage application can help you understand how much house you can afford.
How the debt-to-income calculation works
If you were to calculate your DTI on paper, it would look something like this:
Monthly debt payments ÷ Pre-tax income = Debt-to-Income ratio (expressed as a percent)
But who wants to do all that math? The NerdWallet Debt-to-Income Ratio Calculator crunches the numbers for you.
Simply fill in each of the fields with your best estimate for each type of monthly debt. You’ll see your current DTI percentage and how it measures up to what lenders are looking for.
How to use our debt-to-income ratio calculator
- If your housing-related monthly debts are below 28%, you may qualify for a larger loan amount than originally expected
- If your total debts are above 36%, it may explain why you weren’t approved despite good credit
- If your DTI is 50% or above, you may have to pay down a substantial portion of your debts before you can purchase a home
Debt-to-income ratio 101
What’s included in your DTI ratio?
Our tool calculates your back-end DTI ratio using potential mortgage payments and the following recurring debts:
- Auto loans
- Student loans
- Minimum credit card payments
- Child support and alimony
- Personal loan or other monthly debts
Of course, these probably aren’t your only monthly expenses. Your back-end DTI ratio can also include what you spend on food, utilities, gas, insurance or entertainment, in addition to proposed mortgage payments. Although lenders may not inspect your back-end ratio to this detail, it’s important to look carefully at these costs so your true monthly financial obligations are represented.
Ideally, your total DTI ratio should be under 36%. Keep this in mind when deciding what “affordable” means for you.
How to improve your DTI
If the calculator shows a DTI over 36%, don’t be too discouraged: you may still have options. And knowing where you stand before filling out a mortgage application can save you a lot of time, money and heartache.
Achieve a lower debt-to-income ratio by:
- Avoiding new debt
- Increasing your income with a side hustle
- Reducing expenses and using the extra cash to pay off debts
Debt-to-income ratio is different than credit utilization ratio, which measures how much credit you’re using versus how much is available to you. But reducing credit utilization will typically improve your DTI.
When can DTI be higher than 36%?
Some mortgages such as those offered by the FHA, “have certain, more stable features” that make it more likely you’ll be able to afford your loan, according to the CFPB. Current FHA loan requirements allow for a total DTI ratio of up to 50% or less.
Both small lenders and large banks may offer loan options at higher DTI percentages. Be sure to compare mortgage loans from several lenders to find the best option for your financial needs.