Debt-to-Income

Debt-to-Income (DTI) Ratio: What It Means for You

Your debt-to-income (DTI) ratio is an important reflection of your overall financial health. While it’s not the only factor lenders look at, DTI helps set realistic expectations for a mortgage by showing safe ranges for new homes or credit options. When evaluating applications, lenders use DTI to measure risk. Generally, a DTI below 36% is considered strong and the lower, the better.

Why is Debt-to-Income Useful?

Debt-to-income tells a potential lender how much income a borrower like you can can put toward new obligations. After all other essentials in your life, this is what is left to cover the new mortgage.

How to Calculate Debt-to-Income

Step 1: Monthly Debt Payments

Add up your monthly bills, which may include:

• Rent or existing mortgage
• Credit card minimum payments
• Student loans
• Auto loans
• Alimony or child support
  
• Other recurring loans
  

Step 2: Monthly Income

Note your gross monthly income (before taxes and deductions).

Step 3: Divide

Divide the total debt payments from Step 1 by your income from Step 2. Multiply by 100 to convert to a percentage.

Example
If your monthly debts total $1,500 and your gross monthly income is $5,000, the math looks like this:
$1,500 ÷ $5,000 = 0.30  
0.30 × 100 = 30%
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In this case, your DTI is 30%.

Step 4: Interpret Your Results

This is what each DTI range means for you:

Less than 36%
Lenders view this as a strong ratio and signals that you can comfortably manage your debt and take on a mortgage.

36–43%
You’re still in range for approval, but lenders may proceed with caution. Adding this new loan could be hard to manage if unexpected expenses arise.

43–50%
At this level, lenders often see higher risk and a conventional mortgage may be difficult.

Over 50%
This is the danger zone. More than half of your income is going toward debt, leaving little room for savings or emergencies. Conventional loans are typically out of reach, though some government options, like FHA loans, may still be available.

What Is the Maximum DTI that Could Be Approved?

Most lenders set the magic number for the maximum DTI at 43 percent. Some lenders pose exceptions to that number. Fannie Mae requires a maximum DTI of 36 percent for buyers with a smaller down payment and a lower credit score on conventional loans.
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On the other end, FHA loans are designed to help first-time and low-income homebuyers. The Federal Housing Administration in some cases allows a DTI of up to 50 percent and requires a down payment of only 3.5 percent.

How to Improve Your Debt-to-income Ratio

Of course, the best way to improve your debt-to-income ratio is to pay off as much debt as possible — particularly high-interest debt, like credit cards — and to keep the balance of your credit cards low.

If you have high credit card debts, you might consider seeking a consolidation, rather than maintaining the minimum monthly payments, where you could lower your interest rates and your monthly payments.

Some debts probably aren’t going to be possible to pay off quickly, like student loans or auto loans. But, if you have installment loans that can be paid down to less than 10 remaining payments, some lenders will choose not to count those loans in your DTI. Remember, the lender is trying to determine your ability to pay for your home over the long haul, so short-term payments are less of a liability.

The other part of the equation is your income. Your employer may or may not be willing to give you a raise. However, if you can increase your monthly income through other means — by getting a part-time job, or joining the gig economy — you’ll be able to lower your DTI and increase the amount of home you can afford.