Debt-To-Income Ratio (DTI): What It Is, Why It’s Important And How To Calculate Yours
Sidney Richardson13-minute read
August 02, 2022
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*As of July 6, 2020, Rocket Mortgage® is no longer accepting USDA loan applications.
If you’re looking to purchase a home, whether you’re a first-time home buyer or looking for your 10th house, it’s important to know what your debt-to-income ratio (DTI) is and how it might affect the process of getting a mortgage loan for you.
If you’re unsure what your DTI is or how to even calculate it in the first place, don’t fret – let’s go over how DTI is formulated, how it affects you and how you can improve your DTI ratio.
What Is Debt-To-Income Ratio?
Your debt-to-income ratio or DTI is a key metric expressed as a percentage that helps lenders gauge your ability to repay a loan when reviewing your mortgage application. It’s easy to calculate: if you add up all your monthly debts and divide that sum by your monthly gross income before taxes, you can get a fairly accurate estimate of your DTI. For example, if your monthly debt payments total $2,000 and your monthly gross income is $6,000, your DTI would be 33% ($2,000 ÷ $6,000), meaning 33% of your income would be going towards paying debts.
DTI is one of the main determining factors for lenders deciding whether to grant you a loan or not, so having as low of a ratio as possible is crucial. If your DTI is too high, lenders may decide not to work with you – or you could fail to qualify for the loan you want.
Why Is DTI Important?
Your DTI is important to both you and lenders because it demonstrates that you have a good balance of debt and incoming funds. It proves to lenders that you are responsible with your money and that you can (or can’t) handle additional debt.
The Consumer Financial Protection Bureau (CFPB) requires that mortgage lenders examine your financial health before you take out a loan to assure that you can afford to repay the money. Calculating your DTI is one of a few ways they go about doing this. If your DTI percentage is low enough, you may qualify for a better loan than you would if you were responsible for more debt. On the other hand, if your DTI is too high, lenders may be unwilling to grant you a mortgage loan, so it’s important to make sure your DTI is within an acceptable range.
How Do You Calculate Debt-To-Income Ratio?
Calculating your DTI is a fairly simple process, as long as you know the right numbers. In the simplest terms, you can calculate your DTI by dividing your total debt each month by your total income. But what expenses actually count toward your total debts? Let’s break down what you should include when estimating your DTI.
While you can calculate this manually, you can also use the debt-to-income calculator in this article to calculate your DTI ratio quickly.
Add Up All Your Monthly Debt
When lenders add up your total debts, they typically do it one of two ways; these two methods of determining your DTI are called front-end and back-end ratios.
Your front-end ratio only takes into consideration your housing related debts, such as rent payments, monthly mortgage payments, real estate taxes, homeowner’s association (HOA) fees, etc.
Your back-end ratio, however, includes those monthly payments as well as other debts that might show up on your credit report, such as credit card payments, personal loans, auto loans, student loans, child support, etc.
Your lender might calculate your front-end or back-end ratio when determining your DTI – and sometimes they may look at both to get a better idea of your financial situation. When calculating your own DTI, it’s a good idea to add all these expenses up as part of your monthly debt to be prepared. Keep in mind that when tallying up your debts, lenders typically only look at things that appear on your credit report – so things like utility payments may not actually count toward your total.
Divide That Total By Your Gross Monthly Income
Once you have an idea of what your monthly debt total is, divide it by your gross monthly income to determine your DTI ratio. Your gross monthly income is the amount of money you make each month before taxes. You can usually find your gross income on your paystubs – or you can calculate it.
If you are a salaried employee, you can divide your yearly salary by 12 to find your gross monthly income. If you are paid hourly, multiply your hourly rate by the number of hours you work in a week and then multiply that number by 52 to get your yearly income, which you can divide by 12 to get your monthly gross income.
Once you know your monthly gross income, you should be able to use it to find your DTI. If you make $4,000 a month as your gross income and your total debts amount to $1,200, the formula to calculate your DTI would look like this:
( $1,200 ÷ $4,000 ) = 0.3, or 30% (DTI)
Use Our Debt-To-Income Ratio Calculator To Find Your DTI
DTI And Your Mortgage
Lenders must evaluate your financial health before deciding to give you a loan to make sure you will be able to repay it. When your DTI is evaluated, lenders typically don’t want to see anything too much higher than 43%, though there are exceptions. You can sometimes still get a loan with a high DTI, but you will likely need to have other factors working in your favor to balance out the larger amount of debt, such as a significant amount of savings or a high credit score.
If your DTI is low enough to qualify you for a loan but still on the higher end, keep in mind that you might qualify for higher interest rates than someone with less debt. The lower your score, typically, the better loan you will qualify for.
What Does Your Ratio Mean?
DTI is a good indicator of financial health and sustainability. Generally, a lower percentage looks better to lenders than a high one – but let’s break down what that means and how a higher or lower DTI may impact you.
If Your DTI Is 36% Or Lower
A DTI ratio of 36% or lower is considered excellent. With less than half of your gross income going toward debt, you are considered an ideal borrower and lenders will be more likely to approve your mortgage and grant you lower rates because you are considered a low risk.
If Your DTI Is Between 36% And 50%
A DTI between 36% and 50% is still considered OK for the most part – you can likely still qualify for a loan fairly easily with a DTI ratio in this range. If your DTI is closer to 50%, however, it may require taking action to reduce debt if you plan on applying for a mortgage soon and hope to get a favorable rate.
If you can afford to do so, you should practice strategies like the snowball method to attempt to pay down some of your debts before applying. While you may have no issues getting a loan, getting rid of some of your debts might help you achieve a lower interest rate going forward.
If Your DTI Is Over 50%
A DTI ratio of over 50% is considered financially unsustainable, and you will likely have trouble qualifying for a conventional loan if the total of your debts consumes more than half of your monthly income.
If you are in this situation, you may want to consider contacting a reputable credit counselor to explore the options available to you. Many small businesses and people who are self-employed live with high debt levels as they build their businesses, so it doesn’t necessarily mean you can never qualify for a loan with a DTI this high. Lenders do consider high DTI ratios to be a risk, however, so it may be in your best interest to attempt to pay down what you can before attempting to get a loan.
What DTI Is Required For A Mortgage?
There are many different types of mortgages available, and each have their own requirements for approval. For a conventional loan, the absolute maximum DTI limit may be somewhere around 50% - whereas an unconforming loan such as a VA jumbo loan might allow DTI ratios up to 60%. Depending on the type of loan you are interested in, the DTI requirement will look different.
If you are in the market for a conventional loan through one of the major mortgage investors like Freddie Mac and Fannie Mae, the highest DTI they allow is around 50%. You’ll also need to have a minimum credit score of 620 to qualify for one of these loans.
For FHA loans, your DTI will generally need to be somewhere between 31% and 50%, depending on the income requirements you meet and other factors such as your credit score and whether you are refinancing.
For VA loans, you may be able to have a DTI of 60% or higher, depending on the size of the loan and your financial health otherwise. For USDA loans, the DTI limit is generally 34% – 46%.
The other qualifying factors for government-backed loans vary based on the type you are looking into; with FHA loans, you may qualify for a mortgage with a credit score as low as 580. While the VA itself has no minimum credit requirement, most lenders do. Rocket Mortgage® requires a minimum credit score of 580 for a VA loan.
Nonconforming loans, or loans that are not subject to governmental regulation or the consumer protections offered by CFPB, often allow you to qualify with a much higher DTI than conforming loans. Some of the most common nonconforming loans are jumbo loans. A jumbo VA loan, for example, has a maximum DTI limit of 60%.
Type of LoanMaximum DTIMinimum Credit ScoreMinimum Down PaymentConventional50%6203%FHA31% – 50%*5803.5%VA45% – 60%*6200%USDA34% – 46**6200%*The maximum DTI for these loans may depend on multiple factors such as your FICO® Score, whether you’re purchasing or refinancing, the size of your loan, etc.**Rocket Mortgage® is not currently accepting USDA loan applications.
What Are My Options If My DTI Is Over 43%?
If you currently have a DTI of 43% or more, it doesn’t mean that you can’t qualify for a mortgage loan – you have options. Let’s go over a few ways you could still qualify for a loan even with a higher DTI percentage.
Apply For A Nonconforming Loan
Those who can’t qualify for a conventional or government-backed mortgage because of credit or DTI problems may want to consider applying for a nonconforming loan.
Nonconforming loan lenders are able to offer mortgages to those that can’t qualify for traditional mortgages. They may accept higher DTI ratios and lower FICO® Scores, but keep in mind that these loans are also considered riskier and will come with higher interest rates – and they’re also typically not government backed or purchased by Fannie Mae or Freddie Mac. These loans can be good options, but be wary of taking out a loan you may not be able to afford.
Apply After Reducing Your Debt
If you’re hesitant to apply for a loan with a high DTI, it may be worth it to simply take time to pay down your debt and prepare to apply for a mortgage in the future. If you’d rather avoid the risks of non-conforming loans, this is your safest and most economical option. There are plenty of ways to go about this, including paying off your highest interest debts first, extending loan terms and even looking into loan forgiveness.
The Bottom Line: DTI Is An Important Gauge Of Your Ability To Repay, And Is Important To Your Prospective Lenders
DTI is an important measure of a credit applicant’s financial health and sustainability and can make or break whether you qualify for a loan. While having a high DTI ratio isn’t the end of the world, lowering it can help you qualify for better loans and lower interest rates.
To learn more about improving your financial stability, check out our guide to building excellent credit.
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