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How your debt-to-income ratio can affect your mortgage

Maintaining an acceptable DTI can help you qualify for a mortgage

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Your debt-to-income (DTI) ratio plays an important role in whether you’re approved for a mortgage. To qualify for a mortgage with the best rates and terms, you'll want to keep your DTI ratio in an acceptable range.

What is an acceptable DTI ratio, and what can you do to get yours in the best range for a mortgage? Read on to learn more.


Key insights

  • Lenders use your debt-to-income (DTI) ratio to assess whether you can afford the monthly payments on the mortgage you’re applying for.
  • Many lenders require a DTI ratio of 36% or less to approve you for a mortgage, but it's possible to qualify with a higher percentage.
  • If your DTI ratio is too high, you can improve it by paying off existing debt and avoiding new debt.

What is debt-to-income ratio?

Your debt-to-income ratio compares your monthly debt obligations with your income. It shows the percentage of your income that must go toward bills each month, which helps lenders evaluate whether you can afford the monthly payments on a mortgage.

Al Murad, the executive vice president of consumer direct sales at the lender AmeriSave Mortgage, advised that you can be rejected for a new mortgage if lenders consider your DTI ratio "high-risk."

According to the Legal Information Institute at Cornell Law School, most lenders like to see your housing debt come in under 28% of your income and your total DTI ratio under 36% of your total gross income.

How can I calculate my DTI?

To calculate your debt-to-income ratio, add up all your monthly debt payments, then divide the total by your gross monthly income.

For example, let's say you have the following bills each month:

  • Monthly rent payment: $1,600
  • Auto loan: $450
  • Credit card minimum payments: $350
  • Total: $2,400

If your gross monthly income is $6,000, you would divide 2,400 by 6,000:

2,400 / 6,000 = 0.4

To convert that number to a percentage, multiply by 100:

0.4 x 100 = 40%

Your DTI ratio in this scenario is 40%.

How does my DTI affect my mortgage application?

Typically, 36% or below is a good DTI ratio for a mortgage. However, there are situations where you can still get approved for a home loan with a higher DTI ratio.

Murad, the vice president at AmeriSave Mortgage, pointed out that conventional loans may have a maximum DTI ratio of 45% to qualify, depending on the lender. And even then, there are situations where a higher percentage could work.

"Borrowers with a DTI ratio of 50% may still qualify for a conventional loan if they have a high credit score and large cash reserves," he said.

Try to keep your DTI ratio at 36% or lower to give yourself the best chance of mortgage approval.

Further, some government-backed home loans — including FHA loans in some cases — have higher DTI maximums. Murad said FHA loans allow a DTI ratio of up to 31% for housing costs and a total DTI ratio of up to 50% with all types of debts and required monthly payments.

VA loans for eligible veterans and active-duty military don't necessarily have a DTI maximum, he said. However, a DTI ratio above 41% could delay the approval process or lead to a higher mortgage interest rate.

"The VA doesn’t establish a maximum DTI ratio but uses it as a measure to help lenders," Murad said.

Ultimately, you may be denied a home loan if your DTI ratio is too high. You may have to consider other home loan products to find financing you can qualify for.

How can I lower my DTI?

If you applied for a mortgage but found out your DTI is too high, or you worry it will be, there are steps you can take to lower it or get approved for a mortgage through other means.

Consider the following:

  • Pay down credit cards and other revolving debt. Paying off credit cards and other debt is a solid way to lower your DTI ratio. By paying more than the minimum payment on credit card balances, you can reduce your minimum payment amount in subsequent months and lower your DTI ratio that way.
  • Pay off any existing loans. Paying off outstanding loans also lowers your DTI ratio. For example, paying off an auto loan with a $450 monthly payment can lower your DTI in one fell swoop.
  • Increase your down payment amount. Saving up more money for a home purchase can lower the amount you need to borrow, reducing your monthly housing payment and making it easier to qualify.
  • Increase your income. If you can earn more money without increasing your monthly debt payments, this will lower your DTI ratio.
  • Choose a less expensive home. Shopping for homes in a lower price range can help you get a lower monthly housing payment, dropping your DTI ratio for the new loan amount and payment.
  • Stop adding new debt. Finally, quit adding to the pile while you're trying to lower your DTI ratio. "Don’t take out any new debt until more of the existing debt has been paid down," Murad advised.

What can I do if my DTI is still too high?

If your DTI ratio is still too high, but you need a mortgage soon, you can explore a few different strategies. For example, you may qualify for an FHA loan with a higher DTI ratio if you can get a co-signer.

Alternative mortgage options like an FHA loan might be a good choice if your DTI is too high.

You can also consider restructuring some of your debts to get a lower monthly payment that helps with your DTI ratio. For example, say you have credit card debt with high interest rates and a big payment each month. Transferring that debt to a new balance transfer credit card with 0% APR for a limited time could help you lower your monthly debt payments and your DTI ratio.

Finally, you could consider "paying points" on your mortgage. With this strategy, you pay an upfront fee to get a lower mortgage rate, thus lowering your new housing payment and your DTI ratio.

You can also improve your financial situation before applying for a mortgage. This typically means paying off debt and saving up a larger down payment until you're in a position to qualify for a home loan with the best rates and terms.

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    FAQ

    What monthly payments are not included in my DTI?

    Generally speaking, monthly payments that don’t count toward your DTI include monthly utility bills, car insurance and health insurance expenses, cable bills, cellphone bills, groceries and entertainment expenses.

    What sources of income are considered when applying for a mortgage?

    Income considered when you apply for a mortgage can include your paycheck (hourly or salaried), self-employment income, military income, Social Security income, rental or property income and other gains you receive regularly.

    Do I list my credit card minimum payments or the amount I typically pay?

    When calculating your DTI ratio, you only need to include the required minimum payments on credit cards you have.

    Bottom line

    Your DTI ratio affects the type of mortgage you qualify for — and whether you qualify at all. With that in mind, keep an eye on your percentage, and make changes to keep your DTI ratio low before you apply for a home loan.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page. Specific sources for this article include:
    1. Consumer Financial Protection Bureau, "What is a debt-to-income ratio?" Accessed Dec. 12, 2022.
    2. Legal Information Institute, "debt-to-income ratio." Accessed Dec. 12, 2022.
    3. Consumer Financial Protection Bureau, "What are (discount) points and lender credits and how do they work?" Accessed Dec. 12, 2022.
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