DTI, debt to income ratio explained

Debt-to-Income Ratio (DTI) Explained

Your debt-to-income ratio, or DTI, is one of the most important numbers lenders use when determining how much mortgage you may qualify for.

DTI compares your qualifying monthly debts with your gross qualifying monthly income. While the basic calculation is simple, mortgage guidelines determine exactly which debts and income can be used.

What to know

1. DTI Compares Your Monthly Debts to Your Gross Qualifying Income

The basic DTI formula is:

Total monthly qualifying debt payments ÷ Gross monthly qualifying income = DTI

For example, if your qualifying gross income is $10,000 per month and your monthly qualifying debts total $4,000:

$4,000 ÷ $10,000 = 40% DTI

The lower your monthly debts are compared with your qualifying income, the more room you generally have for a mortgage payment.

2. Your Mortgage Payment and Other Recurring Debts Are Generally Included

Your DTI normally includes your proposed mortgage payment along with other recurring debt obligations.

Your housing expense may include principal, interest, property taxes, homeowners insurance, mortgage insurance and HOA dues when applicable.

Other debts can include car loans and leases, student loans, minimum credit card payments, personal loans, installment loans, and applicable child support or alimony obligations.

3. Normal Living Expenses Usually Aren't Included

Mortgage lenders generally don't include everyday expenses such as groceries, utilities, cell phone bills, internet, gasoline, clothing and entertainment when calculating DTI.

That's why DTI shouldn't be confused with your personal household budget.

You may qualify for a particular mortgage payment under lending guidelines, but you should still decide whether that payment comfortably fits your own budget.

4. Housing Ratio and Total Debt Ratio Measure Different Things

Your housing ratio, sometimes called the front-end ratio, compares your proposed housing expense with your gross qualifying income.

Your total debt ratio, or back-end ratio, includes the housing expense plus your other qualifying monthly debts.

For many mortgage programs, the total debt ratio receives the most attention when determining how much you can qualify for.

5. There Isn't One Maximum DTI That Applies to Every Borrower

There is no single DTI limit that applies to every mortgage applicant.

Acceptable DTI can depend on the loan program, automated underwriting findings, credit profile, down payment, cash reserves, occupancy, property type and overall strength of the loan.

Conventional, FHA, VA and USDA programs can have different requirements. A higher DTI doesn't automatically mean you can't qualify.

6. Qualifying Income May Be Different From the Income You Actually Earn

Lenders must determine how much of your income qualifies under mortgage guidelines.

Salary income may be straightforward, but overtime, bonuses, commissions, part-time employment, self-employment, rental income, retirement income and other variable income can require additional analysis.

This can be particularly important for self-employed borrowers. Your actual business cash flow and the taxable income a lender can use for qualifying purposes may be very different.

7. Student Loans and Credit Cards Have Special Qualifying Rules

Student loan payments can be tricky because the payment lenders must use may depend on the mortgage program and available documentation.

With credit cards, lenders are generally more concerned with the required monthly payment than the total outstanding balance.

Paying down or eliminating certain debts may improve your DTI, but discuss your situation with your loan officer before moving money or paying off accounts solely to qualify.

8. Large Car Payments Can Significantly Reduce Your Home-Buying Power

A large vehicle payment can substantially reduce the mortgage payment you qualify for.

For example, a $700 monthly car payment for someone earning $8,000 per month consumes 8.75% of gross monthly income before the new housing payment is even considered.

If you're planning to buy a home soon, think carefully before financing an expensive vehicle or taking on another large monthly obligation.

9. There May Be Several Ways to Improve a High DTI

If your DTI is too high for the mortgage you want, possible solutions may include reducing or paying off certain debts, documenting additional qualifying income, increasing your down payment, adding an eligible co-borrower or considering another mortgage program.

A lower purchase price, lower property taxes, lower HOA dues or less expensive homeowners insurance may also help.

Sometimes a relatively small change can make a meaningful difference in qualifying.

10. Avoid Taking on New Debt Before Your Mortgage Closes

A pre-approval doesn't mean your financial profile is locked in.

Lenders may recheck your credit, employment, income and debts before closing.

Avoid financing a new car, furniture, appliances, home improvements or other major purchases without first talking with your loan officer. A new monthly payment could increase your DTI enough to affect your approval.

11. DTI Is Important, but Lenders Evaluate Your Entire Financial Profile

DTI is only one part of mortgage underwriting.

Lenders also evaluate your credit, qualifying income and ability to repay, funds available for your down payment and closing costs, cash reserves, and the property securing the mortgage.

A higher DTI doesn't necessarily mean you won't qualify, and a low DTI doesn't guarantee approval.

The Bottom Line

DTI answers a fairly simple question: How much qualifying income do you have compared with the monthly debts you're required to pay?

The more complicated part is determining which income can be used, which debts must be counted and which mortgage guidelines apply to your particular loan.

Before assuming your DTI is too high—or relying solely on an online mortgage calculator—have your actual income and debts reviewed.

You may qualify for more than you think, and if your DTI is currently too high, there may be ways to improve your qualifying position.

Have Questions About Your Debt-to-Income Ratio?

If you're buying or refinancing a home, I can review your income and monthly debts and explain exactly how the numbers work.

No sales pressure—just straightforward answers and easy-to-understand home loan numbers.