Mortgage lenders place great emphasis on debt-to-income (DTI) ratio to determine how much house you can afford, and whether you’ll be approved for a mortgage.
What Is Debt-to-Income Ratio?
Your DTI ratio is your total monthly debt payments divided by your gross monthly income.
For example: if you earn $10,000 a month and pay $2,000 toward debt (student loans, car payments, credit cards), your DTI is 20 percent.
DTI is split into two categories:
Front-end DTI: Monthly income that goes to housing-related costs (mortgage, taxes, insurance). The percentage is calculated by using this formula: (housing expenses/gross monthly income) * 100.
Back-end DTI: Monthly income that goes to paying debt. The percentage is calculated using this formula: (total monthly debt expense/gross monthly income) * 100.
Why It Matters: A low DTI signals to lenders that you’re more likely to repay your mortgage. A high DTI suggests you’re financially stretched and therefore high risk.
Some lender guidelines for DTI:
Below 36%: Ideal for most loan programs.
36–43%: Acceptable, especially with strong credit.
Above 43%: Risky, may require compensating factors or disqualify the borrower altogether.
It’s seen as ideal for most lenders that front-end DTI sits at about 28 percent, while back-end DTI doesn’t exceed 36 percent.
Improving Your DTI
Some ways to reduce your DTI and boost your mortgage eligibility:
Pay down existing debt. Target high-interest balances first.
Increase income. A side hustle, freelancing, or second job.
Avoid new debt. Don’t take out new loans or open credit cards.
Consolidate. If rates lowered since you took out the loan, refinancing existing debt.
How Different Debts Affect Affordability
All recurring debt counts toward DTI, including the following:
Student loans: Counted at actual monthly payment.
Car loans: Applying for an auto loan can cause your credit score to dip temporarily.
Credit cards: Only minimum monthly payments are included, but high utilization also hurts credit scores.
All these loans can impact your credit score, which in turn can make getting approved for a mortgage difficult. The more debt you carry, the less room you’ll have for a mortgage payment, limiting the size of the home you can afford.
Understanding DTI and managing it wisely can make the difference between securing a home loan or falling short. For homebuyers, keeping DTI low is not just good advice; it’s a critical part of the process.
To learn more about home financing and the buying process, visit newhomesource.com/learn.
James Klingele
James Klingele holds a Bachelor of Science in Digital Media Innovation from Texas State University. He is a digital media specialist and content creator with a passion for storytelling in both print and digital formats. His work has included covering high-profile events like SXSW, where he contributed to content creation for global audiences. He has been a content specialist for NewHomeSource since 2024.