The debt-to-income ratio needed for a mortgage depends on the type of loan you plan to use. Find out what affects your debt-to-income ratio and how to improve it.
What debt-to-income ratio† do you need for a mortgage? It depends.
Different loan programs have different debt-to-income ratio (DTI) requirements, so a lot comes down to the type of loan you hope to get. We’ll explain the requirements below. But a good rule of thumb is that the lower your DTI, the better your chances of getting approved — and the more money you may be able to borrow.
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A debt-to-income ratio, or DTI, is your total monthly debt payments divided by your gross monthly income (meaning your income before taxes). DTI tells lenders how much of a monthly mortgage payment you can afford.
DTI takes all of your monthly debts into account, including bills such as:
● Rent or mortgage payments
● Auto loan payments
● Personal loan payments
● Student loan payments (private and federal)
● Credit card payments
● Child support and alimony payments
Some types of bills, such as medical debt, are generally not counted toward DTI.
“Typically collection payments do not count toward a debt ratio unless some sort of payment plan is required by the lender,” says Ryan Plattner, a Fairway branch manager in Leawood, Kansas.
Borrowers may be surprised to learn that DTI refers to your monthly debts, not the total amount you owe on all accounts.
“Most people don’t realize the monthly payments go into the debt-to-income ratio, and not the amount of debt,” says Tom Tevis, a Fairway loan officer in Flower Mound, Texas. “Also, student loan payments are calculated differently depending on loan type.”
In fact, 37% of homebuyers had student loan debt when they purchased their homes, according to the National Association of REALTORS®. It’s common for buyers to owe $30,000 or more and still qualify for a mortgage.
So, DTI is important to qualifying, but a loan officer can explain the different rules and calculations once you’re ready to start your homebuying journey.
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There are two types of DTI: front-end and back-end ratio.
Front-end DTI refers only to your housing expenses. You can calculate your front-end DTI by dividing your potential monthly mortgage payment by your gross monthly income, then multiplying it by 100.
Here’s an example:
● Mortgage payment, including principal, interest, property taxes, and homeowners insurance (PITI): $2,000
● Gross monthly income: $7,000
2,000 ÷ 7,000 = 0.286
0.32 x 100 = 28.6%
Your front-end DTI is 28.6%.
Note that if you buy a home in a community with a homeowners association, your homeowner association fee will be calculated into your DTI as well.
Your back-end DTI includes your mortgage payments plus all of your other monthly debt obligations, including car loans and student loans. This is the number mortgage lenders will look at when you apply for a home loan. They need to ensure that you have enough monthly income to afford your housing payment in addition to all other existing debts.
Here’s an example of back-end DTI:
● Mortgage payment: $2,000
● Student loan payment: $650
● Car loan payment: $400
● Credit card: $250
● Gross monthly income: $7,000
Total monthly debts are $3,300. To calculate your back-end DTI, you divide your monthly debts by your gross monthly income and multiply it by 100.
$3,300 ÷ $7,000= 0.47
0.47 x 100=47%
As you’ll see in the next section, a back-end DTI of 47% is a bit high for most mortgage loan programs. Your loan officer may advise you to pay down a portion of your debt to get your DTI to a qualifying range.
Plus, reducing your debt can also improve your credit score, which helps you qualify for a home loan and can help you get a more competitive interest rate.
However, guidelines vary based on the loan program, so let’s get into the specifics.
The DTI guidelines for the most common loan programs are as follows:
● Conventional loans: 50%
● FHA loans: 50%
● VA loans: 41%
● USDA loans: 43%
A few important caveats, though.
These are the basic DTI guidelines set by their coordinating agencies, but mortgage lenders can set their own guidelines on top of these, which are known as overlays.
A lender could decide not to accept borrowers with a DTI above 45% for a Conventional loan, even though the guidelines allow them to go up to 50%.
But the opposite is also true, Plattner says.
“Government products like FHA and VA typically allow a higher percent than Conventional products. They can go up to 50% and even into the low 50% if there are good compensating factors,” he says. “Conventional loans, [lenders] usually like to stay below 45%, but with excellent credit and a larger down payment, they will allow up to 50% in some cases.”
Additionally, the government agencies — FHA,VA, and USDA — give lenders discretion to approve borrowers who have higher DTIs than the guidelines suggest. That means that a VA borrower who has a DTI of 44% but is otherwise well qualified for the loan may still be approved. It just comes down to the lender’s own guidelines.
In general, a lower DTI can increase your chances of qualifying for a home. You may also qualify for more money, allowing you to buy a larger property or have more flexibility to make a competitive offer.
Additionally, a lower DTI signals less risk for your lender. Borrowers who have lower risk may qualify for the most competitive interest rates.
Still, your loan officer can help you determine your best options, whatever your DTI may be today.
“It is important that you are exploring all options with a certified mortgage advisor so they can help you structure your debt in the most cost-effective manner,” says Rebecca Carr, a Fairway loan officer in Denver, Colorado. “With some small changes on re-allocation of debt and optimizing monthly cash flow, we can maximize what a homebuyer can get pre-approved for.”
Chris Gonzalez, a Fairway loan officer in Freeport, New York, echoes this perspective.
“Homebuyers should know that DTI is something that they have some control over,” he says. “If a lender simply collects income and credit information to calculate the DTI without much thought, chances are I can find a way to get a lower figure (which may be the difference in qualifying) by offering some simple options a borrower has that may improve their entire financial picture.”
If you find that after calculating your DTI that it’s higher than you’d like, there are a few ways you can lower it before you apply for a mortgage.
Lowering the amount of debt you’re carrying is probably the most effective way tp achieve a good debt-to-income ratio. Take a look at your credit cards and loans and see where you can make the biggest dent, such as paying off the entire balance of your smallest outstanding account.
Before paying off a loan, however, check with the lender to find out whether there are prepayment penalties. Depending on how much the penalties are, you might opt to continue paying on the current schedule and focus on paying off other accounts sooner.
Though it’s not always possible, increasing the amount you make can also lower your DTI.
Ideas of how you can increase your income include:
● Working overtime or increasing your hours at your current job
● Taking on a side job
● Adding a side hustle such as freelancing or becoming a rideshare driver
Keep in mind that while increasing your income can lower your DTI, lenders have stipulations as to what income gets counted in their calculations. For instance, you’ll need to prove that your new source of income will be consistent and ongoing. In some cases, such as with self-employment income, you will need to show two years of earnings for that money to count toward your loan application.
Most lenders would prefer their applicants to have a debt-to-income ratio of 43% or less, ideally at 36% or less.
DTI requirements will vary depending on the lender and the type of loan you plan to get. Most loan program guidelines have DTI requirements below 50%, though lenders may be able to make exceptions in some cases. FHA loans typically allow DTIs of up to 50% and in some cases, higher.
Yes, it can. Having a high DTI ratio could mean you will be denied for a loan, or only qualify at higher mortgage interest rates. If possible, aim to lower your monthly bills before applying for a mortgage to increase your chances of qualifying and getting a competitive interest rate.
It’s always worth talking to a lender, even if you think your DTI is on the high side. You may end up qualifying anyway, and if you don’t, they may be able to help you strategize how to pay qualify as soon as possible.
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†Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
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