Homebuying decoded: What is a debt-to-income ratio?

This key factor can impact your financial future — and your ability to get a mortgage.

You’ve diligently saved for a down payment, and your credit score is in good standing. But before you dive into the mortgage application process, there’s another factor to consider: your debt-to-income (DTI) ratio. 

Your DTI ratio serves as a vital indicator of your financial health, and mortgage lenders look at it closely when making lending decisions. In fact, according to the 2024 Home Buyers and Sellers Generational Trends Report by the National Association of Realtors, 48 percent of prospective buyers were denied a mortgage because of their DTI.  

“Your DTI ratio is critical because it allows underwriting to ensure the loan is within the risk threshold outlined in the financing guidelines,” says Mitchell Rutledge, a mortgage loan officer at U.S. Bank. 

So, what exactly is DTI, and why does it matter? Let’s break it down. 

What is DTI?

DTI is the ratio of how much you make versus how much you owe: your monthly debt payments divided by your gross monthly income. This ratio is used by mortgage lenders to determine how much debt you can comfortably manage given how much debt you already have.  

The lower your DTI, the more likely you are to be approved for a home loan. As a general rule of thumb, your DTI should be below 36 percent to be approved for most types of mortgages, although that number can be higher depending on your circumstances and the type of loan you’re applying for. 

“A high DTI is something that should be evaluated immediately,” says Rutledge. “If the DTI is high, then the chances of being approved for a mortgage are slim to none.” 

How do you calculate your DTI?

The math behind calculating your DTI is quite straightforward. First, determine your gross monthly income, which is the amount of money you make before taxes and other deductions are applied — usually your total salary divided by 12.  

Then, calculate your total monthly debt payments, which may include a mortgage, child support, student loan payments, credit card minimums and car loans. (Only debts are used to calculate your DTI — not recurring expenses like groceries, utilities, childcare or insurance premiums.) 

Divide your total monthly debt by your total gross monthly income, and multiply the result by 100.  

For example, let’s say you make $60,000 per year on salary. Divide that by 12 to get your gross monthly income (in this case, $5,000). Now imagine that you have $200 in student loan payments, $300 in car payments and $1,500 in a projected future mortgage payment. Add these together and your total monthly debt payment is $2,000. When you divide $2,000 by $5,000 and multiply it by 100, you get 40, which is your DTI ratio.  

“One of the most common mistakes people make when calculating their DTI is not including the estimated new mortgage payment or using an inaccurate estimate,” says Rutledge. “So don’t forget that important figure.” 

How does DTI affect mortgage affordability?

A standard rule for lenders is that mortgage payments on their own should not exceed 28 percent of your gross monthly income. When a mortgage is combined with other debts, your total DTI should ideally be below 36 percent, as noted earlier, to qualify for most types of mortgages issued by private and federal lenders. 

Generally, mortgage lenders will look at both your front-end DTI, which only factors in your monthly housing costs — for example, mortgage payments and insurance, as well as property taxes — and your back-end DTI, which includes all your monthly debts. (When people refer to DTI, they are generally referring to back-end DTI.)  

Most mortgage lenders prefer a front-end DTI below 31 percent — so, in essence, less than a third of your income going toward housing costs. 

In certain circumstances, like if a lender judges that you’re likely to increase your earnings or if you’re buying an energy-efficient property, lenders may grant mortgages to borrowers with back-end DTIs between 36 percent and 45 percent. Other circumstances that appeal to lenders include a good credit history despite a high debt load or the expectation of decreased expenses in the coming year, such as the cessation of child support payments or a student loan that’s almost paid off. 

“A borrower with high DTI can also pay off debt, utilize a larger down payment (that is, finance a smaller amount) or add a co-applicant or co-signer,” says Rutledge. 

In most cases, your DTI cannot exceed 45 percent to be approved for a conventional mortgage. Although there are no DTI limits on U.S. Department of Agriculture loans and Veterans Affairs loans, those subject potential borrowers with DTIs above 41 percent to increased scrutiny. With some qualifying factors — including high down payments or significant cash reserves — Federal Housing Administration loans may be granted to borrowers with DTIs up to 50 percent. 

How can you lower your DTI?

There are many ways that you can lower your DTI. Among them are increasing your income and paying off debts, especially those with high interest rates. 

Keep in mind that changes in your spending habits can also influence your DTI. For example, purchasing a new car with higher monthly payments can significantly alter your DTI ratio, as can buying something expensive using a BNPL (buy now, pay later) service such as Afterpay or Klarna.  

It’s probably a good idea to avoid making large purchases or lifestyle changes when you’re preparing to apply for a mortgage. 

During this period, “I always advise my customers not to open or close any debts, avoid major changes with employment and keep tabs on monthly payments,” says Rutledge. “You should also speak with a licensed mortgage loan originator to go over any questions you may have before or after submitting the initial loan application and making offers on homes.” 

Dig into more articles, tools and resources to help you on your homebuying journey.