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What does DTI Mean for a Mortgage?
What you'll learn: What you need to know about debt-to-income ratio and how it affects mortgages.
EXPECTED READ TIME: 4 MINUTES
May 17, 2024
Just like your credit score, your debt-to-income (DTI) ratio is an important percentage that lenders will use to determine if you qualify for a home loan. You can calculate your own DTI ratio prior to applying, but it is important to understand how it works, the effect it will have on obtaining a mortgage, and the steps you can take to lower it.
What is a debt-to-income ratio?
Your debt-to-income ratio is the percentage of your monthly income that is spent towards paying off debt. Credit card debt, student loans, car loans, and current mortgage payments will all be considered in the DTI calculation to determine your ratio.
There are two types of DTI ratios that a lender will consider when evaluating your mortgage application: front-end ratio and back-end ratio.
Front-end ratio: Your future monthly mortgage payment—including property taxes, homeowners insurance, and mortgage insurance—divided by your gross monthly income.
Though most lenders will take your front-end ratio into account, your back-end ratio will hold more sway over their decision to approve you for a mortgage.
Back-end ratio: The percentage of your monthly income that is spent on debt repayment. Lenders will use this percentage to determine your financial health and if you qualify for taking on monthly mortgage payments. It will typically be higher than your front-end ratio since it is taking all of your monthly debt obligations into consideration.
How do DTI ratios work?
In order to calculate your DTI ratio, lenders will add up your minimum monthly payments on all applicable debt, including:
- Rent or monthly mortgage payments
- Auto loan payments
- Student loan payments
- Child support or alimony
- Credit card payments
- Personal loan payments
That total is then divided by your gross monthly income. Initially, that result will be a decimal that is then converted into a percentage by multiplying by 100. For example, let us say your total monthly debt equals $850 and your gross monthly income is $3,000. Using the DTI calculation, you will find that you have a DTI ratio of 28.3%.
What is a good debt-to-income ratio?
Determining whether or not you have a “good” DTI ratio can be subjective; it will depend on your lender’s requirements and the type of mortgage you decide on. Generally, a DTI ratio of 43% or less is accepted by most lenders. However, a DTI ratio higher than 50% is considered high risk, signaling to lenders that the borrower has a high amount of debt and is unlikely to bear the responsibility of repaying a mortgage.
Here is a breakdown of DTI ratios and how they are often viewed by mortgage lenders:
- DTI less then 36%: Your debt is well managed relative to your income, indicating you have savings and flexibility in your budget. Lenders are likely to view you as a responsible borrower and approve your mortgage.
- DTI between 36% to 49%: Though some lenders may still approve your mortgage application, others may be deterred. While the current debt you have is manageable, consider paying down some of it before applying.
- DTI over 50%: Paying down this level of debt may be difficult and your lending options will be very limited.
How to lower your debt-to-income ratio
Taking steps to reduce your DTI ratio will go a long way in helping you qualify for a mortgage. To get it under control, take these steps:
- Increase your income. Whether you hold off on applying for a home loan until that promotion, or you decide to start a side gig, increasing the amount of money you have coming into your accounts each month will help you reduce your DTI ratio.
- Track your spending and create a budget that focuses on paying down the debt you currently have.
- Consider consolidating your debt at a lower interest rate. This will help you reduce the minimum monthly payments that lenders will use in their DTI calculations.
- Avoid taking on any additional debt, like using a credit card for a large purchase or taking out a personal loan.
- Consult with a credit counselor who can help you enroll in a debt management plan.
Remember that it is important to take the time improving both your DTI ratio and credit score prior to applying for a mortgage. That way, you will have more home loan and rate options, leading to more savings in the long run.
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Disclosures
1Conventional Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
2FHA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 96.5%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
3VA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.125 discount point, which equals 1.125 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $450,000; loan-to-value ratio of 95%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of $995.
4Jumbo Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 0.625 discount point, which equals 0.625 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.
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