You’re debt-to-income ratio is the amount of your income that is spent on reoccurring monthly bills, such as credit cards and auto loans.
Mortgage lenders use your debt-to-income ratio (DTI) ratio to determine how much of a loan you qualify for.
To calculate your DTI, take your total monthly payments and divide it by your gross monthly income (before taxes).
Total payments divided by monthly income = Debt-to-income ratio
John has these monthly payments and is seeking a mortgage loan with a $1,000 monthly payment.
- Monthly mortgage payment = $1,000
- Auto lease = $300
- Personal loan = $200
- Monthly minimum payments on credit cards = $500
Total debt payments = $2,000
John makes $60,000 per year ($5,000 per month)
(Total monthly debt payments) $2,000 divided by $5,000 (Gross monthly income) = 40%
John has a 40% debt-to-income ratio and will qualify for the home loan.
Use our home affordability calculator to see how much house you can afford. The calculator uses your debt-to-income ratio and includes mortgage insurance, property taxes, and homeowners insurance to give you the most accurate estimate of what you can afford.
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The Maximum Debt-to-Income Ratio For Mortgages
The amount of a loan you qualify for will be determined using your DTI ratio. The lower it is, the less likely you are to default on the payments.
Borrowers with high DTI ratios are 70% more likely to default on a loan than borrowers with DTI.
The maximum debt-to-income ratio for a mortgage was 45% up until 2017 when Fannie Mae and Freddie Mac raised the limit the maximum debt-to-income ratio is 50%.
Government backed mortgages, such as FHA loans and VA loans may be possible with a debt-to-income ratio above 50% in some cases. Borrowers must have compensating factors to qualify for a mortgage loan with high DTI.
Compensating Factors for High DTI
- Large down payment (20% or higher)
- Extra cash reserves (large savings)
- Excellent credit score (700+)
- High income ($100,000 per year or more)
- Long and stable employment history
Borrowers with high DTI above 43% are considered high risk to default, you should expect a higher interest rate on their mortgage.
Two Types of Debt-To-Income Ratios Lenders Use
Front-end debt-to-income ratio is your DTI not including a mortgage payment. The maximum front-end ratio allowed by lenders is 28%. However, the ideal DTI ratio 23%.
Back-end debt-to-income ratio is your DTI including your estimated mortgage payment. This ratio should be no higher than 43%, and in some cases can be as high as 50%, although the ideal debt-to-income ratio for mortgages is 36%.
Types of Monthly Debt Obligations Included in DTI Ratio
Not all payments should be used when calculating your debt to income ratio. For instance, utilities, cell phone bills, and car insurance are not included in your DTI ratio. Here is a list of the types of debt payments that should be included.
- Mortgage payment
- Total property taxes divided by 12
- Monthly homeowners insurance
- Car loans or lease payments
- Student loan payments
- Minimum credit card payments
- Personal loans and lines of credit
- Child support and alimony payments
If you are a co-signer on any loans, or an authorized user on a credit card account these monthly payments will be included.
Types of Income to be Included
- Monthly Wages
- Commissions, bonuses, and tips
- Social security payments
- Child support payments
- Additional income you claim on your tax return
Lowering Your DTI Before Applying
If you’re DTI ratio is over 36% you should take some steps to lower it.
If you have credit cards with high balances you should work on paying them down. Not only will lower credit card balances lower your minimum payments, but it will increase your credit score.
With a higher score you can get lower rates, and it will make you look like less of a risk to the lender. This will greatly increase your odds of getting approved.
Your debt-to-income ratio is how lenders determine how much of a loan you qualify for.
The maximum DTI ratio is 50% on conventional loans, but can be over 50% for FHA and VA loans if you have compensating factors.
Buyers with high DTI are considered at risk of defaulted on payments, because of this interest rates are higher.
The ideal debt-to-income ratio is 36%, if yours is higher than that you should take some steps to lower it.
Paying down credit card balances will lower your payments which will improve your DTI.
Are you ready to get pre-approved for a mortgage?
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.