What is the Debt-to-Income (DTI) Ratio?
Your Debt-to-Income (DTI) ratio is a personal finance measure that compares the amount of debt you have to your overall income. Lenders, including mortgage issuers, use this ratio to measure your ability to manage your monthly payments and repay the money you plan to borrow.
Essentially, it answers the question: "How much of your monthly income is eaten up by debt?"
How is DTI Calculated?
The formula for DTI is straightforward. You divide your total recurring monthly debt by your gross monthly income (income before taxes). The result is multiplied by 100 to get a percentage.
(Total Monthly Debt Payments ÷ Gross Monthly Income) × 100 = DTI %
Example: If your monthly gross income is $5,000 and your total monthly debt payments (rent, car loan, credit cards) equal $2,000, your DTI is 40% ($2,000 ÷ $5,000 = 0.40).
Why DTI Matters for Mortgages
When applying for a mortgage, your DTI ratio is one of the most critical factors alongside your credit score. It helps the lender determine the risk associated with lending to you.
- Front-End Ratio: This only calculates housing-related expenses (mortgage principal, interest, taxes, insurance, and HOA fees) divided by income.
- Back-End Ratio: This includes housing expenses plus all other recurring debt (credit cards, student loans, car payments). This calculator focuses on the Back-End ratio, which gives a complete picture of your financial health.
Interpreting Your DTI Score
Different lenders have different thresholds, but generally, the following ranges apply:
35% or Less: Excellent
You have a healthy balance between debt and income. Lenders view you as a low-risk borrower, and you are likely to qualify for the best interest rates.
36% to 43%: Manageable
You are in a decent position, but your debt is starting to take up a significant portion of your income. You will likely find a lender, but you might be scrutinized more closely.
44% to 49%: Concerning
You are approaching the danger zone. Many conventional lenders cap their DTI requirements at 43% for Qualified Mortgages, though FHA loans may allow higher ratios. You may face higher interest rates.
50% or Higher: High Risk
With half your income going to debt, you have very little flexibility for emergencies or savings. Most lenders will deny a mortgage application with a DTI this high.
How to Lower Your DTI Ratio
If your DTI is higher than you'd like, consider these strategies before applying for a loan:
- Pay off small debts: Using the "snowball method" to eliminate small credit card balances or personal loans can quickly reduce your monthly obligations.
- Increase your income: Taking on a side gig, asking for a raise, or including a co-borrower on the application can increase the denominator in the calculation.
- Refinance existing loans: Extending the term of a car loan or student loan might lower the monthly payment, thereby lowering your DTI (though you may pay more interest over time).
- Avoid new debt: Do not open new credit cards or buy furniture on credit while preparing for a mortgage application.