Key Takeaways:
Debt-to-income ratio helps lenders determine how much house you can afford.
A lower DTI ratio is more appealing to lenders because it shows you have more financial flexibility and are less risky to lend to.
Borrowers with high DTI ratios may have a harder time getting approved for a mortgage.
When it comes to getting approved for a mortgage, lenders look at more than just your credit score and income. They also care about how much debt you have. Even with a strong credit score and other factors, having significant debt can make affording a home difficult, since even one unexpected expense could stretch your budget too thin.
Understanding what debt-to-income ratio you need to get approved for a mortgage can help you plan and prepare for that process. By strengthening your financial profile, you’ll put yourself in a better position to own a home.
What is debt-to-income ratio
Lenders use debt-to-income ratio to determine how much a potential borrower can afford to pay on a mortgage. This ratio includes most sources of debt and income, but it doesn’t include everyday expenses like utilities or groceries. Generally, having a higher debt-to-income ratio makes it harder to secure financing to buy a house.
How to calculate your DTI ratio
Calculating your DTI ratio is pretty straightforward. First, add up your monthly debt payments.
These can include:
Mortgage payments
Rent payments
Credit card payments
Auto loans
Personal loans
Other regular debt payments
After that, simply divide that number by your gross monthly income to find your debt-to-income ratio.
Monthly debt payments / Gross monthly income = DTI
For example, let’s say you currently pay $2,000 per month on your current mortgage and $400 per month on other debts. If your gross monthly income is $7,000, your DTI would be about 34%.
($2,000 + $400) / $7,000 = ~0.34
It’s also important to understand which expenses do and don’t factor into your DTI so you get an accurate picture of your situation. Utilities , insurance premiums, phone bills, groceries, and discretionary spending are not included
What is a good debt-to-income ratio?
In general, the lower your DTI is, the better. Following the “28/36 rule,” which says that your monthly debt shouldn’t exceed 36% of your gross monthly income, is a helpful guideline to keep your debt manageable..
A lower DTI not only improves your chances of getting approved, but also gives you more flexibility to handle unexpected expenses without added financial stress.
What debt-to-income ratio do you need to get approved for a mortgage?
Lenders consider several factors to determine whether to approve a mortgage application, and DTI is a key one. In many cases, lenders prefer a DTI below 36%. However, some borrowers may still qualify with a higher DTI – often up to 45% or more – depending on factors like credit score, savings, and income stability.
When is your DTI ratio too high?
Your debt-to-income ratio is generally considered too high if it exceeds your lender’s maximum ratio. This can vary by lender. Most prefer for borrowers to stay below 36%, but some will accept DTI ratios of up to 45% or higher if you have strong compensating factors, like a higher credit score or larger down payment..
DTI requirements by loan type
The type of loan you apply for can impact your required debt-to-income ratio.
Loan Type
DTI requirement
Conventional loan
36%
USDA loan
41%
VA loan
Typically 41%, but flexible depending on lender guidelines
FHA loan
43%
How to lower your DTI ratio
Your debt-to-income ratio might be high now, but there are ways to lower it. Some strategies include:
Pay down existing debt, especially high-interest debt.
Increase your income by taking on work on the side, if possible.
Avoid taking out new loans while preparing to apply
Increase your down payment to reduce how much you need to borrow.
FAQs about debt-to-income ratio
Is debt-to-income ratio based on pre-tax income?
Yes, your gross monthly income, or pre-tax income, is used to calculate your DTI.
Is student loan debt included in the debt-to-income ratio?
If you’re currently paying off outstanding student loan debt, those monthly payments can be factored into your DTI.
Can I get a mortgage with a high DTI?
Having a high debt-to-income ratio won’t stop you from getting a mortgage. However, you may need compensating factors like a higher credit score, larger down payment, or strong savings to qualify.
