Debt to Income Ratio for Mortgage Loans: What Is Your DTI?

A debt-to-income ratio (or DTI ratio) is a calculation mortgage lenders use to determine a borrower’s financial health and ability to meet debt obligations, specifically the affordability of a monthly mortgage payment. Lenders calculate the ratio by comparing your total monthly debt payments (such as student loan payments, credit card payments, car payments, insurance premiums, alimony, and other monthly bills) to your monthly gross income.

Lenders prefer a good debt-to-income ratio (usually lower than 36 percent) combined with a high credit score and the minimum down payment when determining borrowing risk.

When qualifying you for a home loan during the mortgage process, your lender examines two debt-to-income ratio types: front-end and back-end.

1. 1. Front-end ratio: Your front-end DTI represents the percentage of your income that goes toward housing expenses only, such as your mortgage payment or rent payment, homeowners insurance, property taxes, and homeowners association (HOA) fees.
2. 2. Back-end ratio: Your back-end DTI represents the percentage of your income that goes toward your total monthly debt obligations (as shown on your credit report), including housing costs. Back-end DTI includes your mortgage loan amount plus the minimum payment on any monthly debt, such as personal loans, car loans, credit cards, child support, or student loans.

Lenders consider your back-end ratio more critical than front-end ratios for home-buying loans, as it includes all of your debt, but they will look at both when you apply for FHA loans (government-backed mortgages).

You can use an online debt-to-income ratio calculator, or calculate your DTI ratio by adding up your total monthly debt payments and dividing them by your total gross monthly income through this process:

1. 1. Add your total minimum monthly debt payments. Only include your debt payments, such as the minimum payment on auto loans and credit card debts. You don’t need to go beyond the minimum payment amount or include monthly bills for items such as food, utilities, or health insurance premiums.
2. 2. Divide your minimum monthly debt payments by your gross monthly income. Your gross monthly income is the income you earn before removing taxes (net income) or the combined gross monthly income of you and anyone else applying for the loan. Divide your monthly minimum payments by your gross monthly income.
3. 3. Multiply by 100. Convert the resulting number to a percentage by multiplying by 100. For example, if your monthly gross income amounts to $4,000, and your monthly debt payments amount to $1,000, you would divide $1,000 by $4,000 to get .25, then multiply by 100 to equal a DTI ratio of 25 percent.

Though lenders vary, and you may be able to qualify for a new loan with a higher DTI, most financial institutions consider a back-end DTI ratio of 36 percent or lower a good DTI ratio and avoid lending to anyone with a DTI above 50 percent. Since a higher credit score and lower DTI ratio help you secure a better mortgage interest rate (which means paying less in the long run), it serves you to pay down your debts as much as possible.

You may have a higher DTI (up to 57 percent) and a lower credit score to qualify for a government-backed FHA loan or apply for refinancing using your current home equity.

Consider these strategies to lower your high DTI ratio and become a more attractive mortgage loan candidate:

1. 1. Add another person to the loan. Adding a person to your loan increases your household’s gross monthly income and automatically lowers your DTI ratio.
2. 2. Avoid additional debt. If you plan on applying for a home loan soon, avoid taking on new debt, which will generate a higher DTI ratio.
3. 3. Increase your income. If possible, increase your gross monthly income with a better-paying job or additional work for at least two years to lower your DTI.
4. 4. Pay off your current debt. Eliminating your monthly debts, even one, such as paying off your auto loan, will improve your ratio and qualify you for a better mortgage rate. The less debt you have, the lower your DTI ratio.
5. 5. Refinance your debt. Refinancing your existing debt to create lower monthly payments decreases your DTI ratio and improves your chances of qualifying for a home loan.

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