Key Takeaways:
- Debt-to-income ratio helps lenders determine how much house you can afford.
- A lower DTI ratio is more appealing to lenders because it shows you have more financial flexibility and are less risky to lend to.
- Borrowers with high DTI ratios may have a harder time getting approved for a mortgage.
When it comes to getting approved for a mortgage, lenders look at more than just your credit score and income. They also care about how much debt you have. Even with a strong credit score and other factors, having significant debt can make affording a home difficult, since even one unexpected expense could stretch your budget too thin.
Understanding what debt-to-income ratio you need to get approved for a mortgage can help you plan and prepare for that process. By strengthening your financial profile, you’ll put yourself in a better position to own a home.
What is debt-to-income ratio
Lenders use debt-to-income ratio to determine how much a potential borrower can afford to pay on a mortgage. This ratio includes most sources of debt and income, but it doesn’t include everyday expenses like utilities or groceries. Generally, having a higher debt-to-income ratio makes it harder to secure financing to buy a house.
How to calculate your DTI ratio
Calculating your DTI ratio is pretty straightforward. First, add up your monthly debt payments.
These can include:
- Mortgage payments
- Rent payments
- Credit card payments
- Auto loans
- Personal loans
- Other regular debt payments
After that, simply divide that number by your gross monthly income to find your debt-to-income ratio.
Monthly debt payments / Gross monthly income = DTI
For example, let’s say you currently pay $2,000 per month on your current mortgage and $400 per month on other debts. If your gross monthly income is $7,000, your DTI would be about 34%.
($2,000 + $400) / $7,000 = ~0.34
It’s also important to understand which expenses do and don’t factor into your DTI so you get an accurate picture of your situation. Utilities , insurance premiums, phone bills, groceries, and discretionary spending are not included
What is a good debt-to-income ratio?
In general, the lower your DTI is, the better. Following the “28/36 rule,” which says that your monthly debt shouldn’t exceed 36% of your gross monthly income, is a helpful guideline to keep your debt manageable..
A lower DTI not only improves your chances of getting approved, but also gives you more flexibility to handle unexpected expenses without added financial stress.
What debt-to-income ratio do you need to get approved for a mortgage?
Lenders consider several factors to determine whether to approve a mortgage application, and DTI is a key one. In many cases, lenders prefer a DTI below 36%. However, some borrowers may still qualify with a higher DTI – often up to 45% or more – depending on factors like credit score, savings, and income stability.
When is your DTI ratio too high?
Your debt-to-income ratio is generally considered too high if it exceeds your lender’s maximum ratio. This can vary by lender. Most prefer for borrowers to stay below 36%, but some will accept DTI ratios of up to 45% or higher if you have strong compensating factors, like a higher credit score or larger down payment..
DTI requirements by loan type
The type of loan you apply for can impact your required debt-to-income ratio.
| Loan Type | DTI requirement |
| Conventional loan | 36% |
| USDA loan | 41% |
| VA loan | Typically 41%, but flexible depending on lender guidelines |
| FHA loan | 43% |
How to lower your DTI ratio
Your debt-to-income ratio might be high now, but there are ways to lower it. Some strategies include:
- Pay down existing debt, especially high-interest debt.
- Increase your income by taking on work on the side, if possible.
- Avoid taking out new loans while preparing to apply
- Increase your down payment to reduce how much you need to borrow.
FAQs about debt-to-income ratio
Is debt-to-income ratio based on pre-tax income?
Yes, your gross monthly income, or pre-tax income, is used to calculate your DTI.
Is student loan debt included in the debt-to-income ratio?
If you’re currently paying off outstanding student loan debt, those monthly payments can be factored into your DTI.
Can I get a mortgage with a high DTI?
Having a high debt-to-income ratio won’t stop you from getting a mortgage. However, you may need compensating factors like a higher credit score, larger down payment, or strong savings to qualify.