Debt-To-Income Ratio: How To Calculate DTI
13-minute readAugust 13, 2021
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*As of July 6, 2020, Rocket Mortgage® is no longer accepting USDA loan applications.
Before approving you for a loan or credit-based product, most potential lenders will want to know about your financial situation. This involves running your credit, asking you questions about your annual income and calculating your overall debt burden.
The latter is measured by what’s called your debt-to-income ratio (DTI). Together with your credit score, your DTI is one of the main factors in determining whether you’ll be approved for a loan – and for how much.
Read on to use our calculator and to learn everything you need to know about your DTI, including why it’s important to your borrowing power when seeking out a loan.
Use Our Debt-To-Income Calculator To Find Your DTI
What Is A Debt-To-Income Ratio?
A DTI ratio is calculated by dividing your total monthly debt by your total monthly income before tax. Expressed as a percentage, DTI is often a major factor in a lender’s decision to offer you a loan.
Put simply, your DTI gives both you and potential lenders a quick glance at how much debt you’re currently carrying compared to how much you earn. If too much of your annual income is earmarked for existing debt payments, it could be difficult to convince a lender to let you borrow even more.
While it may sound similar, your DTI is different from your credit utilization ratio. The latter is a calculation showing how much of your available credit you’re already using, while the former is a calculation showing how much of your income is being taken up by existing debt.
Your DTI will be calculated by many lenders, whether you’re looking to take out a home mortgage, get a personal loan or even refinance your car. So, while you may already recognize the importance of this number, you also need to know what goes into calculating it. This includes knowing the difference between front- and back-end ratios.
Front-End And Back-End Debt-To-Income Ratios
There are technically two ways to calculate your DTI, both giving a different perspective on your financial situation. Your potential lender may even choose to calculate both when deciding whether to approve a request to borrow.
The first DTI version is referred to as the front-end, or housing expense, ratio. This calculation takes into account your gross monthly income compared to your overall housing expenses.
These expenses include principal and interest payments on your home mortgage (or monthly rent payment, if you don’t own), real estate taxes (if you own the property), homeowners (or renters) insurance premiums, and homeowners association dues (if applicable).
The second calculation, or back-end ratio, still includes these monthly housing expenses. The difference is the back-end ratio also adds in the other debt accounts that show up when a lender requests a copy of your credit report, such as auto loans, personal loans, credit card balance and student loans.
With a back-end ratio, your total debt burden and associated payments are compared to your monthly income. This differs from a front-end ratio, which only considers your housing expenses and how they compare to your income.
If you’re looking to get approved for a new mortgage, either or both of these DTI calculations may come into play.
Some lenders and mortgage investors they work with may even have staunch limits regarding the percentage of your monthly income that can be earmarked for housing expenses and separate limits for total debt payments. This is the case with certain FHA and USDA mortgage loans, but lenders may set their own thresholds as well.
What’s Included In A Debt-To-Income Ratio?
There are many monthly expenses that won’t make it into your DTI ratio calculations even though part of your income is allocated toward them. That’s because your DTI ratio typically only includes the accounts that show up on your credit report (with a few exceptions) – not everything you pay monthly is part of the equation.
DTI-applicable expenses include:
- Your house payment: If you have a home mortgage, your monthly payment will be included in both the front- and back-end DTI calculations. If you rent, this is sometimes reported to the credit bureaus (in which case it would be included); other times, it’s not. Your lender may also choose to include rent in this calculation even if it’s not reported on your credit, but this depends on the lender and their specific requirements.
- Auto loans: If you financed your vehicle and are still paying off the loan, expect it to be included in your DTI calculation.
- Personal loans: If you’ve taken out a personal loan (to cover a variety of expenses such as consolidating existing debt, paying off high-interest credit cards or funding a large expense such as a wedding), your monthly obligation will be included in your DTI.
- Student loans: Whether your student loans are federal or private, expect your monthly payment(s) to be a factor in your DTI.
- Minimum monthly payment on credit card accounts: Your credit card balance changes every month if you’re using the card regularly. Even still, your lender will almost always include the minimum monthly payment on that account when calculating your back-end DTI.
- Minimum monthly payment on home equity lines of credit: The same goes for HELOCs: if you’re using the line of credit and owe, your lender will use the minimum monthly payment obligation in your DTI calculation.
- Alimony and child support: Established payments for alimony and child support will typically be added into your DTI calculation as they’re monthly financial obligations. This is true even though they aren’t reported on your credit.
Not every bill you pay will appear on your credit, though. Basic living expenses like utilities, cable, cell phone bills and monthly fees for any subscription services won’t show up.
This doesn’t mean there won’t be any consequences for your credit if you don’t pay these bills. Unpaid bills of this type can end up being reported as collections, which can have a big negative impact on your credit score. However, there’s no effect from these types of accounts on your DTI.
How To Calculate Debt-To-Income Ratio
To calculate your DTI ratio, add up your total debt and divide it by your income. For example, if your monthly debt is $2,000 and your monthly income is $6,000, your DTI is $2,000 ÷ $6,000, or 33%.
The hardest part is ensuring you’re including the right numbers in both your debt calculation and your income. The numerator will change depending on whether you want to calculate your back- or front-end DTI.
1. Add Up Total Monthly Debts
The very first step is to calculate what your monthly debt total is, which will be impacted by the DTI calculation you need. If it’s your front-end DTI, or housing expense ratio, you’ll add up expenses involved with maintaining your home: mortgage principal and interest, homeowners insurance, HOA fees and property taxes.
Principal + Interest + Property Taxes + Homeowners Insurance + Association Dues
If you’re interested in your back-end (or overall) DTI to see the bigger picture, you’ll want to include all applicable debt payments. This means adding in those same household expenses from a moment ago as well as things like student loan payments, minimum credit card payments, car payments, HELOC payments and the like.
Monthly Housing Expenses + Other Monthly Debts
This gives you an idea of your total debt burden.
2. Divide By Gross Monthly Income
The next step is to divide the sum of your debt by your monthly income. When doing so, be sure to use your gross monthly income – meaning before taxes – rather than your net income.
If you get paid biweekly, it can be difficult to know exactly what your true monthly income comes out to be.
If you’re an hourly employee, take your hourly rate and multiply it by the number of hours you work each week. Then multiply that number by 52 to get your annual income and then divide that whole number by 12. The result is your monthly income.
If you’re a salaried employee, simply divide your annual pay by 12 to determine your gross monthly salary.
Now, take that monthly number and use it to divide out your front- and/or back-end DTI debt calculations from the step above.
Let’s say you have a monthly gross income of $6,000 and spend $1,500 between your mortgage payment, homeowners insurance and property taxes. In this case, your housing expense ratio would be 25% ($1,500÷$6,000=0.25). This is your front-end DTI ratio.
Now, what about your back-end ratio?
Let’s take that same $6,000 monthly income with the $1,500 mortgage payment. Then, let’s add a $400 car payment, a $200 student loan payment and $250 in minimum payments between a handful of credit cards. (If you pay alimony, child support, etc., this is the time to add those as well.)
In this case, your back-end DTI would be just over 39% ($2,350÷$6,000=0.39).
Evaluating Your DTI
So, you have calculated your DTI. Now what do you do with it?
For loan qualification purposes, the lower your DTI, the better. You’ll have more room in your budget to afford the loan, but where is the dividing line? Is there a point at which you cross the boundary into having too much debt?
The answer can depend on the type of loan you’re trying to get. Depending on what sort of products or accounts you’re trying to obtain, different lenders will have different requirements for this percentage.
DTI: Mortgage Requirements
One of the biggest areas where DTI comes into play is if you’re trying to qualify for a mortgage. So, if you’re looking to buy a home soon, what kind of DTI do you need?
To have the easiest time qualifying for the most possible home loan options, a good general guideline is your DTI should be 43% or lower.
That’s not to say you can’t get a mortgage with a higher debt burden, because you can. However, you might need other factors working in your favor, such as holding greater savings, adding a co-signer to your loan or having a higher FICO® Score.
Things like your DTI and credit score can go beyond whether you’re approved or not and extend to the types of terms you’re offered. If you’re just good enough to get approved, you might receive a higher interest rate than someone with a slightly better financial record.
DTI For A Conventional Loan
If you’re looking to get a conventional loan through the major mortgage investors Fannie Mae or Freddie Mac, the highest DTI they allow on their loan products is 50%. However, for the best chance of approval, we recommend a DTI of no higher than 45%.
The minimum median FICO® Score to qualify for conventional loans through Fannie Mae or Freddie Mac is 620 or higher.
DTI For An FHA Loan
Where DTI requirements for conventional loans are pretty standard, the FHA has a few different guidelines depending on the situation.
One of the unique features of an FHA loan is the ability to qualify with a median FICO® Score of as low as 580. However, to qualify with a score that low, you’ll need to keep an equally low DTI. In this instance, the FHA requires mortgage lenders to look at both your front- and back-end ratio.
This means you can have a DTI of no higher than 38% with only the mortgage payment included. After adding your other debts, DTI can be no higher than 45%. If you have a credit score that is that low, it could affect how much home you can afford.
In most states, if you have a FICO® Score of 620 or higher, one of the advantages of FHA is you can qualify with a slightly higher DTI than you could on many other loans.
FHA doesn’t give specific percentages because they choose to base the qualification on a variety of risk factors, which might include your credit score and the size of your down payment, among others. However, the maximum DTI you can have under any circumstances is 57%.
DTI For A VA Loan
If you’re a qualifying active-duty servicemember, reservist, member of the National Guard, veteran or surviving spouse of someone who passed in the line of duty or as a result of a service-connected disability, you should certainly look into getting a VA loan.
In addition to the fact that no down payment is required, one of the principal advantages of a VA loan is you can qualify with a higher DTI than you can on any other loan. For a fixed-rate loan, as much as 60% of your monthly income can go toward paying debts if your median FICO® Score is 620 or higher. For adjustable rate mortgages, the maximum DTI is 50%.
It’s worth noting that the VA sets no specific standards for credit scores, but lenders can set their own. For example, Rocket Mortgage® requires a median score of 580.
DTI For A USDA Loan
For a USDA loan (available to those buying properties in qualifying rural areas who meet income limits), DTI varies based on a variety of factors as it would with an FHA loan. However, in no instance will you be able to qualify with a housing expense ratio greater than 34% or a total DTI higher than 46% at this time.
Although the USDA requires no specific median FICO® Score, it’s hard to qualify with a score under 640. No down payment is required with these loans, but because you don’t have to put anything down, you do need to watch your DTI closely.
How To Lower Your DTI
There are essentially two ways that you can lower your DTI: reduce your debt burden or increase your income.
This might be easier said than done for many. However, chances are you’ll have better luck by focusing on increasing your income, at least in the short-term, rather than focusing on reducing debt.
You can approach this in several ways. If it feels reasonable, try first asking for a raise at work. Getting paid more for the job you’re already doing is the simplest way to increase your income. You could also consider working more hours, starting a side hustle or even getting a second job to boost that bottom line.
You may also want to take a two-tiered approach by earning a bit more and working to lower your debt burden at the same time.
Here are other tips to help you lower your DTI:
Make a budget. Put your income on one side and all of your expenses on the other. Make sure you’re covering at least the minimum monthly payment on all of your installment debts and setting aside money to put food on the table.
Once you’ve done that, take a look at how much you have left over. It’s this leftover money that’s the real key to improving your DTI and is where making a budget really shines.
When you have a budget in place, it’s easier to identify unnecessary spending. You can keep yourself on-target while minimizing expenses that hurt your efforts – even the tiny ones. In fact, you might be surprised by how quickly the small purchases can make a big difference.
Make a debt payment plan. If you’re looking to get approved for a loan very soon, you should consider paying off the loan with the biggest monthly payment first and then the next largest monthly payment. This is because DTI is all about looking at your monthly costs.
If applying for a loan seems far away, one thing you might consider to save yourself some money in the long run is to pay off the loan or balance with the highest interest rate or APR. A typical high-interest item is a credit card.
Although this isn’t the most efficient method of making debt payments, the snowball method can be satisfying. The idea here is you pay off debts with the smallest balance first so you can feel a sense of accomplishment. Then, you move on to the next lowest balance.
It won’t save you the most from a financial standpoint, but the trick here is it keeps you motivated based on the progress you see.
Find ways to make your debt less burdensome. If you’ve been good about making your monthly payment, you might want to call your credit card issuers to see if they would be willing to lower your interest rate. If this fails, consider moving debts from high-interest credit cards to a lower-interest credit card.
Finally, some people find it easier to pay off credit cards – and other debts – by consolidating them with a personal loan.
Pay off debts that have gone to collections. If you happen to have anything that’s a collection or charge-off from the past, pay this off first. If you pay it off, a creditor will be more likely to delete the collection or charge-off from your credit report if you ask, which will instantly improve your credit score.
If you can’t pay the whole thing off, call the creditor and negotiate an amount you’re able to pay. Some money is better than nothing. This will show up on your credit report as “paid as agreed.” While it’s not quite as good as not having a collection, it’ll be better for your score than doing nothing about it.
Don’t take on new debt. When you’re trying to dig yourself out of debt, the worst thing you could do is add more of it to the pile. If you can avoid it in any way, try your best to not take on any new debt that would sabotage your efforts.
Summary: Why Your DTI Is Important
Whether you’re looking to buy a new home, refinance existing debt or open any number of financial accounts, your debt-to-income ratio will likely come into play. The lower this ratio, the less of your income is already spoken for by your debt, meaning that you have more income available to take on new accounts.
Having a reasonable DTI makes you appear more attractive to potential lenders as they know it’s likely easier for you to make payments on time every time compared to someone who has less wiggle room in their budget.
In addition to a low DTI, having a healthy credit score can boost your chances of approval. (Rocket HQSM is here when you’re ready to check your credit score for free and monitor your efforts over time!)
Additionally, finding a lender with requirements that match your current financial situation may open the door to a competitive mortgage loan, even if you aren’t yet where you want to be. Visit Rocket Mortgage® if you want to learn more about your mortgage options or begin the process of obtaining a new home loan.
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