Your debt-to-income ratio (DTI) is an important part of how mortgage lenders evaluate your financial health. DTI ratios represent how much debt you have compared to your income.
It’s important to know your DTI as you consider buying a home. If you have a high amount of debt compared to income, consider `lowering your debt before applying for a loan. Even if you’re prepared to apply for a loan, you may struggle to find a lender willing to work with a high DTI.
Let’s look at DTI, how it works and how it impacts your mortgage application so you can prepare to start shopping for homes.
Your debt-to-income ratio, or DTI, is a percentage that tells lenders how much money you spend on monthly debt payments versus how much money you have coming into your household. You can calculate your DTI by adding your monthly minimum debt payments and dividing the total by your monthly pretax income.
The result can give you an idea of where your finances stand and how much home you can realistically afford.
Your lender may look at two types of DTI during the mortgage process: front-end and back-end DTI.
Front-end DTI only focuses on housing-related expenses. It’s calculated using your current monthly mortgage or rent payment, including property taxes, homeowners insurance and any applicable homeowners association dues.
Lenders typically won’t worry about this number when reviewing your mortgage application, except for some exceptions, such as Federal Housing Administration (FHA) loans. However, the result can give you an idea of where your finances stand and how much home you can realistically afford.
Back-end DTI includes your housing-related expenses and all the minimum required monthly debt payments your lender finds on your credit report, including credit cards, student loans, auto loans and personal loans.
Your back-end DTI is the number most lenders focus on because it gives them a more complete picture of your monthly spending.
Your DTI offers lenders a better understanding of your overall financial health. The ratio shows how much debt you have relative to your monthly income. It helps lenders assess your ability to cover the cost of a monthly mortgage on top of any existing debt.
Most lenders will accept a DTI ratio of 43% or less. However, it’s helpful to understand how different ranges can impact your chances of approval when applying for a mortgage.
Let’s look at typical DTI ranges and how they can impact mortgage qualification:
Figuring out your DTI can help you decide if now is the time to buy a home. If your DTI ratio is high, waiting may be a better option. However, if your ratio is low, you can take advantage of your proven ability to manage debt and apply for a home loan.
Calculating your debt-to-income ratio is essential to understanding where you’ll stand with lenders before applying. Here’s how to calculate your DTI ratio in a few short steps.
To calculate DTI, include your regular, required and recurring monthly payments. Only use your minimum payments – not the account balance or the amount you typically pay. For example, if you have a $10,000 student loan with a $200 minimum monthly payment, you should only include the $200 minimum payment when calculating DTI.
Here are some examples of applicable debt when applying for a mortgage:
Certain expenses should be left out of your minimum monthly payment calculation, including the following:
Here’s an example of calculating your total monthly payments to determine your DTI. Imagine you have the following monthly expenses:
Add $500, $125, $100 and $175 together, and the total is $900 in minimum monthly payments.
Your gross monthly income is the total pretax income you earn each month. If another borrower is applying with you, you should factor in their income and debts, too.
Once you’ve determined the total gross monthly income for everyone on the loan, divide the total of minimum monthly payments by the gross monthly income.
Your initial result will be a decimal. To express your DTI ratio as a percentage, multiply the result by 100. In this example, your gross monthly income is $3,000, and your minimum monthly payment total is $900. When you divide $900 by $3,000, you’ll get 0.30. Multiply 0.30 by 100 to get 30, making your DTI ratio 30%.
You’d likely meet a lender’s DTI requirement because the DTI ratio falls below 43%.
The lower your DTI, the better. In most cases, you’ll need a DTI of 50% or less, but the specific DTI requirement will depend on the lender and the mortgage type.
The Federal Housing Administration backs FHA loans. FHA loans have more lenient qualification requirements than other loans. Borrowers must have a minimum credit score of 580 to qualify for the loan.
The maximum DTI for FHA loans is 57%. However, a lender can set their own requirement. This means some lenders may stick to the maximum DTI of 57%, while others may set the limit closer to 40%. Do your research and speak with each lender you’re considering working with. They’ll tell you what ranges they accept.
Borrowers can only use U.S. Department of Agriculture (USDA) loans to buy and refinance homes in eligible rural areas. Your DTI must be lower than 41% to qualify for a USDA loan.
USDA loans have a few unique requirements. First, you can’t get a USDA loan if your household income exceeds 115% of the median income for an area.
Second, your lender must consider the income of everyone in the household when evaluating your eligibility for a USDA loan. Lenders must verify income for everyone living in the home – even if they aren’t on the loan.
When determining whether your DTI qualifies you for a USDA loan, your lender will only factor in the income and debts of the borrowers on the loan. If other people live in the home, your lender will only consider their income to determine whether your household meets the loan’s income limits. It won’t factor into your DTI.
Please note that Rocket Mortgage® doesn’t offer USDA loans at this time.
VA loans are insured by the Department of Veterans Affairs. They offer a low-cost way for eligible current and former members of the armed forces and their surviving spouses to buy a home. VA loans don’t require a down payment and often have more lenient DTI requirements. You may be able to get a VA loan with a DTI of up to 60% in some cases.
Every lender will set their own requirements, though. Speak with your lender to learn what their requirements are.
There’s no single set of requirements for conventional loans. The DTI eligibility requirement typically depends on a borrower's finances, credit history and loan type. Generally, borrowers need a DTI of 50% or less to qualify for a conventional loan. If your DTI is high, you’ll need to offset your debt with high cash reserves to secure a loan.