When reviewing a loan application, lenders consider an applicant’s debt-to-income ratio, or DTI. Your DTI shows lenders how much of your monthly income goes toward paying existing debts and whether you’ll have enough remaining money each month for your mortgage payment. Each mortgage lender has slightly different criteria for DTI. In general, lenders are looking for a DTI below 36%, but you can still get a mortgage with a DTI above this number.
How debt-to-income ratio is calculated
DTI is calculated by adding up all your monthly debt payments and dividing that by your gross monthly income. Not every monthly expense is part of this calculation. See the table below for what to include and exclude.
|Included in DTI||Excluded from DTI|
|Monthly mortgage payment, including taxes and insurance if escrowed||Monthly utilities (e.g., electricity, gas, garbage)|
|Monthly car payment||Cell phone bill|
|Minimum monthly credit card payments||Cable bill|
|Monthly student loan payments||Grocery bills|
|Monthly personal loan payments||Car insurance premium|
|Monthly child support/alimony payments||Entertainment costs (e.g., eating out, going to movies)|
It’s a good idea to know your DTI before you meet with a lender. You can calculate your DTI by dividing your total monthly debt by your gross monthly income. Use the chart above to know what to include and not include in the first part of the formula. Note that for credit cards you should include minimum monthly payment rather than your most recent or average payment amount.
DTI example calculation
Debt-to-income ratio = total monthly debt payments/gross monthly income.
You have a pretax income of $4,500 per month. Your monthly expenses include $1,200 for rent, a $200 student loan payment, a $250 car loan payment and a $50 minimum credit card payment.
To calculate your DTI, add the expenses together to get $1,700. Then divide $1,700 by $4,500, which equals .378. Your DTI is 37.8%. Rules differ by lender, but most like to see a DTI of 36% or lower.
DTI and mortgages
In general, you are seen as a less risky borrower if you have a DTI of 36% or lower. If you have a higher DTI, it doesn’t mean you won’t qualify for a loan. But your other numbers will need to show you’re a financially stable borrower. For example, if your DTI is 45% but your credit score is 790 and you’re putting 20% down, the lender is more likely to approve you for a loan. However, if your DTI is 45%, you have a below-average credit score and less than 20% to put down, you are more likely to be turned down for a loan.
Factors that make up a mortgage debt-to-income ratio
The mortgage process is full of numbers and acronyms that can confuse even experienced buyers. By taking the time to educate yourself and determine your own DTI, you’ll be a step ahead when you apply.
If you’re unsure whether one of your monthly payments should be factored into your DTI, a good rule of thumb is to examine your credit report. If the credit report shows a debt account and you make monthly payments on that account, then include it in the DTI calculation. You can also ask each lender how it calculates DTI. Common monthly expenses in DTI include:
- Monthly mortgage payment or rent
- Monthly car payment
- Minimum monthly credit card payment
- Monthly student loan payments
- Monthly personal loan payments
- Monthly child support and alimony payments
Even though other monthly costs, like utilities and food, aren’t part of your DTI, you shouldn’t disregard them when budgeting for a new home. These expenses can add up fast and affect your ability to pay. In addition to calculating your DTI, you might create a spreadsheet of all your monthly expenses and see if a mortgage payment fits in your budget.
What is a good debt-to-income ratio?
Even though you’ll often hear that your DTI can’t be over a certain amount — you might have heard of the 36% rule — there is no specific number that qualifies you for a home loan. In some cases, your DTI can be in the mid-40s and you will still qualify for a mortgage.
That said, if your DTI is around 45%, you’ll need a very high credit score and down payment to balance it out. If your DTI is over 50%, there is little chance a lender will approve you for a loan.
How to improve debt-to-income ratio
If you’re denied a loan, or if you know your DTI is too high, there are steps you can take to lower it. Your DTI is just a snapshot in time of your current monthly debt in relation to your income and can improve with a little work. Consider these options:
- Consolidate your loans: Consolidating all your debts with a debt consolidation loan from a single lender might lower your monthly debt payment, which in turn lowers your DTI.
- Pay off a loan: If you’re able to borrow from yourself or from someone else, it could help to pay off one loan before you submit a mortgage application.
- Increase your income: The only two types of numbers that matter for your DTI are your debts and your income. If you can’t budge on your debt, the next thing to look at is your income. Are you due for a promotion soon? Is there any extra work you can take on with your current job to increase your pay, or is there another position in the same field that you could apply for that might help you earn a bit more? Keep in mind that lenders include income sources other than wages in a DTI.
- Get a cosigner: If your DTI isn’t going to improve anytime soon, one option is to find a cosigner with low debt who is willing to guarantee the loan.
- Increase debt payments across the board: If you have time, a longer-term solution is to start putting more money toward debts to pay them off sooner.
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