What Is Debt-To-Income Ratio?

Debt-To-Income Ratio (DTI)

Understanding your debt-to-income ratio is a critical piece of the mortgage loan approval process. It is the number one way for lenders to determine your ability to manage your monthly payments and repay your new loan.

Your DTI ratio is all of your monthly debt payments divided by your gross monthly income.

To calculate your personal debt-to-income ratio you’ll need to add up all of your monthly debt payments and obligations, and divide it by your gross monthly income. Your gross monthly income is the amount of money you earn before taxes and deductions are taken out.

For example, if your monthly debt payments equal $2,000 and your gross monthly income is $6,500, then your DTI ratio would be 31 percent.

How Is Debt-To-Income Ratio Calculated?

To dive in deeper into how DTI is calculated, let’s go over what’s included in the calculation, and the difference of debts vs expenses.

Your monthly debt payments include:

• Monthly mortgage or rent payment*
• Minimum credit card payments
• Auto loan payments
• Student loan payments
• Personal loan payments
• Monthly alimony and/or child support payments
• Other debt payments that show up on your credit report

*Note: Rent is only included if not moving from where you rent to a new home.

Your monthly expenses that aren’t included in your DTI ratio are:

• Utility bills
• Monthly groceries & food expenses
• Car insurance premiums
• Healthcare coverage
• Daycare
• etc.

The lender isn’t going to factor these items into your DTI ratio, or their decision on how much money they will lend you.

But keep in mind, just because you may qualify for a $400,000 mortgage, doesn’t mean that you can afford that monthly payment that goes along with your new mortgage.

What Is A Good Debt-To-Income Ratio?

What lenders consider to be a good debt-to-income ratio is roughly a 30 percent front-end DTI(debts only), or a 36 percent back-end DTI(debts + expenses).

It’s always important on a personal note to keep your monthly debts and expenses as low as possible, ideally under the marks above. Don’t worry if your DTI ratio is higher than what’s listed above, we have a lot of loan programs and lenders that accept higher DTI ratios based on credit score, assets, savings, etc.

Conventional mortgages backed by Fannie Mae and Freddie Mac will accept a DTI ratio up to 50 percent, and FHA loans will allow DTI as high as 56.99 percent! In many cases for VA loans the lender will only look at residual income.

When you get pre-qualified, your loan officer will let you know your specific debt-to-income ratio and how it affects your options. In some cases you may be required to pay off a specific debt before or at closing in order to receive final loan approval.

Your debt-to-income ratio is also the exact reason why your loan officer will never recommend you purchase a new car or open a new line of credit during the loan approval process. Even if the new debt obligation keeps you under your DTI cap, it almost always throws a wrench in the process.