What is Debt-to-Income (DTI) Ratio?
Two Types of DTI
1. Front-End DTI (Housing Ratio)
2. Back-End DTI (Total Debt Ratio)
Why DTI Matters for Mortgages
DTI Limits by Loan Type
Conventional Loans
FHA Loans
VA Loans (Veterans Only)
USDA Loans (Rural Properties)
What's Included in DTI?
✅ Included (Counts Toward DTI)
❌ NOT Included (Doesn't Count)
DTI Ranges and What They Mean
Excellent DTI: Under 28%
Good DTI: 28-36%
Moderate DTI: 36-43%
High DTI: 43-50%
Very High DTI: Over 50%
How to Improve Your DTI
1. Pay Down Debt (Fastest Impact)
2. Increase Income
3. Lower Your Housing Budget
4. Avoid Taking on New Debt
DTI Calculation Example
Sample Borrower:
Calculations:
Common DTI Mistakes to Avoid
Your debt-to-income (DTI) ratio is the percentage of your gross monthly income that goes toward paying debts. Lenders use DTI as a key factor in mortgage decisions because it shows your ability to manage monthly payments and repay borrowed money.
Formula: (Monthly Housing Costs ÷ Gross Monthly Income) × 100
Housing costs include: Mortgage principal & interest, property taxes, homeowners insurance, HOA fees, and PMI (if applicable).
Standard limit: ≤ 28% for conventional loans, ≤ 31% for FHA
Formula: (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
Total debt includes: All housing costs PLUS auto loans, student loans, credit card minimum payments, personal loans, alimony, child support, and other recurring debts.
Standard limit: ≤ 36% for conventional loans, ≤ 43% for FHA
- Mortgage Approval: Lenders use DTI as THE key factor in loan decisions
- Interest Rates: Lower DTI often qualifies for better rates (save thousands)
- Borrowing Power: Lower DTI means you can afford a more expensive home
- Financial Health: DTI indicates overall debt burden and stability
- Front-End: ≤ 28%
- Back-End: ≤ 36% (ideal), up to 43% with strong credit/down payment
- Best For: Borrowers with good credit (620+) and 5-20% down payment
- Notes: Most common loan type, competitive rates, PMI required if <20% down
- Front-End: ≤ 31%
- Back-End: ≤ 43%
- Best For: First-time buyers, lower credit scores (580+), small down payments (3.5%)
- Notes: Government-backed, easier qualification, but higher insurance costs
- Front-End: No specific limit
- Back-End: ≤ 41%
- Best For: Active-duty military, veterans, eligible spouses
- Notes: No down payment required, no PMI, funding fee applies
- Front-End: ≤ 29%
- Back-End: ≤ 41%
- Best For: Rural/suburban homebuyers, low-to-moderate income
- Notes: No down payment, income limits apply, property must be in eligible area
- Mortgage payment (principal & interest)
- Property taxes
- Homeowners insurance
- HOA/condo fees
- PMI (private mortgage insurance)
- Auto loan payments
- Student loan payments (even if deferred)
- Credit card minimum payments
- Personal loans
- Alimony and child support payments
- Any other recurring debt obligations
- Utilities (electric, water, gas, trash)
- Phone and internet bills
- Car insurance
- Health insurance
- Life insurance
- Groceries
- Entertainment subscriptions (Netflix, Spotify, etc.)
- Transportation costs (gas, public transit)
- Other living expenses
- ✅ Qualifies for all mortgage types
- ✅ Best interest rates available
- ✅ Lenders view you as low-risk
- ✅ Strong borrowing power
- Action: You're in great shape! Shop around for the best rates.
- ✅ Qualifies for most conventional mortgages
- ⚠️ May not get the absolute best rates
- ✅ Still considered financially healthy
- Action: Consider improving to under 28% for best terms, but you're mortgage-ready.
- ⚠️ May qualify with compensating factors (high credit score, large down payment)
- ⚠️ FHA and VA loans are likely options
- ⚠️ Conventional loans may require exceptions
- Action: Strongly consider debt reduction before buying to avoid financial strain.
- ❌ Mortgage approval is difficult
- ❌ Limited loan options
- ❌ Higher interest rates if approved
- Action: Focus on debt payoff before applying. Delay home purchase if possible.
- ❌ Mortgage approval is extremely unlikely
- ❌ You may be financially overextended
- Action: Prioritize debt reduction and income increase. Consider financial counseling.
- Pay off smallest debts first: Snowball method for quick wins
- Target high-interest debt: Avalanche method saves most money
- Consider debt consolidation: Lower monthly payments by combining debts
- Focus on non-housing debt: Paying off car loans or credit cards helps both front-end and back-end DTI
- Side hustle: Gig work, freelancing (must show 2-year history for lenders)
- Ask for a raise: Higher base salary immediately improves DTI
- Overtime: Consistent overtime income counts toward DTI
- Rental income: 75% of rental income can be counted
- Buy a less expensive home: Reduces front-end DTI significantly
- Increase down payment: Lowers monthly mortgage payment and PMI
- Shop for lower interest rates: Even 0.25% lower can help
- Consider a longer loan term: 30-year vs 15-year lowers monthly payment
- Don't buy a new car right before applying for a mortgage
- Avoid opening new credit cards
- Don't take out personal loans
- Wait until after closing to make major purchases
- Gross monthly income: $6,000
- Proposed mortgage payment (P&I): $1,200
- Property tax: $200/month
- Homeowners insurance: $100/month
- Car payment: $400/month
- Student loan: $250/month
- Credit card minimums: $100/month
Front-End DTI:
Housing costs = $1,200 + $200 + $100 = $1,500
Front-End DTI = ($1,500 ÷ $6,000) × 100 = 25% ✅ (under 28%)
Back-End DTI:
Total debts = $1,500 (housing) + $400 + $250 + $100 = $2,250
Back-End DTI = ($2,250 ÷ $6,000) × 100 = 37.5% ⚠️ (over 36%, may need FHA)
- Forgetting deferred student loans: Lenders often count these even if not currently paying
- Using net income instead of gross: DTI is based on income BEFORE taxes
- Ignoring HOA fees: These are part of housing costs
- Not including PMI: If down payment is <20%, PMI adds to housing costs
- Applying right after taking on new debt: New car loan can tank your DTI