Important points:
Your debt-to-income ratio helps lenders determine how much home you can afford. A lower DTI ratio is more attractive to lenders because it indicates greater financial flexibility and lower loan risk. Borrowers with a high DTI ratio may have a harder time getting approved for a mortgage.
Lenders don’t just consider your credit score and income when getting approved for a mortgage. They also care about how much debt you have. Even if your credit score and other factors are good, having a lot of debt can make it difficult to buy a home because one unexpected expense can put you too far within your budget.
Understanding the debt-to-income ratio you need to get approved for a mortgage can help you plan and prepare for the process. Strengthening your financial profile can put you in a better position to own a home.
What is the debt to income ratio
Lenders use debt-to-income ratios to determine how much a potential borrower can pay on a mortgage. This ratio includes most debts and sources of income, but excludes everyday expenses such as utilities and groceries. In general, the higher your debt-to-income ratio, the harder it will be to secure funds to purchase a home.
How to calculate DTI ratio
Calculating the DTI ratio is very simple. First, add up your monthly debt payments.
These include:
Mortgage payments Rent payments Credit card payments Auto loans Personal loans Other regular debt payments
Then, simply divide that number by your gross monthly income to find your debt-to-income ratio.
Monthly Debt Repayment Amount / Total Monthly Income = DTI
For example, let’s say you currently pay $2,000 a month on your current mortgage and $400 a month on your other debts. If your gross monthly income is $7,000, your DTI is approximately 34%.
($2,000 + $400) / $7,000 = ~0.34
It’s also important to understand which expenses are and aren’t considered for DTI to get an accurate picture. Does not include utilities, insurance, phone bills, groceries, or discretionary expenses
What is an appropriate debt-to-income ratio?
In general, the lower the DTI, the better. Following the 28/36 rule, which states that your monthly debt should not exceed 36% of your gross monthly income, is a helpful guideline to help you manage your debt.
A lower DTI not only increases your chances of approval, but also gives you more flexibility to handle unexpected expenses without increasing your financial stress.
What debt-to-income ratio do I need to get approved for a mortgage?
Lenders consider several factors to decide whether to approve your mortgage application, and DTI is an important one. Lenders often prefer a DTI of less than 36%. However, some borrowers may qualify for a higher DTI (often up to 45% or more) depending on factors such as credit score, savings, and income stability.
When is the DTI ratio too high?
If your debt-to-income ratio exceeds your lender’s maximum ratio, it is generally considered too high. This may vary depending on the lender. In most cases, borrowers prefer to stay below 36%, but some will accept DTI ratios up to 45% or higher if there are strong compensating factors, such as a higher credit score or a larger down payment.
DTI requirements by loan type
The type of loan you apply for can affect the debt-to-income ratio you need.
Loan Type DTI Requirements Conventional Loan 36% USDA Loan 41% VA Loan Typically 41%, but flexible depending on lender guidelines FHA Loan 43%
How to lower the DTI ratio
Your debt-to-income ratio may be high right now, but there are ways to lower it. Some strategies include:
Pay off existing debt, especially high-interest debt. If possible, increase your income with a side job. Do not take out a new loan while your application is being prepared. Increase your down payment to reduce the amount you borrow.
Frequently asked questions about debt-to-income ratios
Is the debt-to-income ratio based on pre-tax income?
Yes, your gross monthly income, or pre-tax income, is used to calculate your DTI.
Is student loan debt included in your debt-to-income ratio?
If you are currently paying off outstanding student loans, you can factor those monthly payments into your DTI.
Can I get a mortgage with a high DTI?
Having a high debt-to-income ratio doesn’t mean you can’t get a mortgage. However, to qualify, you may need compensating factors such as a higher credit score, a larger down payment, and more savings.
