Your debt-to-income ratio (DTI) is one of the first numbers lenders check when you apply for a loan. It shows how much of your monthly income is already going toward debt, giving lenders a snapshot of your financial balance.
Most mortgage lenders set the cutoff around 43%. If your DTI is below that number, you’ll have an easier time getting approved. If it’s higher, you may need to make changes before applying to boost your chances.
What Is Debt-to-Income Ratio?
Debt-to-income ratio (DTI) compares your monthly debt payments to your gross monthly income. It’s a quick way for lenders to measure how much debt you’re carrying and whether you can take on more.
If your DTI is high, it signals that most of your income is already tied up in debt, which makes lenders less confident you can handle another loan. A lower DTI, on the other hand, shows you have breathing room in your budget and are more likely to qualify for better loan terms.
How to Calculate Debt-to-Income Ratio
The formula for calculating DTI is straightforward:
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
Let’s look at an example. Say you have:
- Mortgage payment: $1,200
- Credit card minimum payment: $100
- Student loan payment: $200
That totals $1,500 in monthly debt. If your gross monthly income is $5,000, your DTI is 30%.
Now imagine adding a $400 car loan. Your debt payments rise to $1,900, and your DTI jumps to 38%. Still manageable, but closer to most lenders’ limits. If instead you pay off the $100 credit card, your DTI falls to 28%, which makes you a more attractive borrower.
Expenses Included in Debt-to-Income Ratio
Not every monthly bill counts toward your DTI. Lenders only look at recurring debt payments, not everyday living expenses.
Included in DTI
- Mortgage or rent payments: Your housing costs each month.
- Minimum credit card payments: Even if you pay more, lenders only count the minimum due.
- Auto loans: Car payments you’re locked into.
- Student loans: Any required monthly payment.
- Child support or alimony: Court-ordered payments.
- Personal loans or other recurring debt: Any installment loans you’re repaying.
Excluded from DTI
- Utilities: Electricity, water, internet, and similar bills.
- Groceries and dining: Everyday living expenses.
- Insurance premiums: Health, auto, or home insurance payments.
- Savings contributions: Retirement or emergency fund deposits.
Why Debt-to-Income Ratio Matters to Lenders
Lenders use your debt-to-income ratio to decide if you can realistically handle more debt. A high DTI tells them your budget is already stretched, which increases the risk of missed payments.
Many lenders also pull your credit report alongside your DTI calculation. If your DTI looks high but you’ve recently paid down balances, your credit report may not reflect the change right away. In that case, you can ask about a rapid rescore, which updates your credit report within a few days and gives lenders the most accurate picture of your debt.
How Debt-to-Income Ratio and Credit Scores Are Connected
Your debt-to-income ratio (DTI) doesn’t directly affect your credit score, but the two numbers often move together. Both give lenders a sense of how you manage debt and whether you’re stretched too thin.
Indirect Effects on Your Credit Score
- High balances: Carrying large balances increases your credit utilization rate, which makes up 30% of your credit score.
- Example: If you have a $10,000 credit limit and a $7,000 balance, your utilization is 70%, which can pull your score down. Paying the balance down to $3,000 drops utilization to 30%, a range lenders prefer.
- Lender review: Even though DTI isn’t shown on your credit report, lenders still check both your DTI and credit score when reviewing applications.
Paying Down Debt Improves Both
- For DTI: Lowering monthly payments—such as paying off a credit card—reduces your debt obligations and improves your ratio.
- For credit scores: Lower balances bring down your credit utilization rate, which can boost your credit score.
- Big picture: Reducing debt makes you a stronger borrower on both fronts, increasing approval odds and improving loan terms.
Debt-to-Income Ratio Requirements by Loan Type
A lower debt-to-income ratio (DTI) makes loan approval easier, but each lender and loan program sets its own limits.
- Conventional loans: Most lenders want DTIs below 43%, which is the standard cutoff for a qualified mortgage. For example, if your gross monthly income is $4,000, your total debt—including your mortgage—should stay under $1,720 (43% of $4,000). Borrowers aiming for stronger approval odds often keep their DTI closer to 36%, or $1,440 in this example.
- FHA loans: These loans are more flexible, sometimes allowing DTIs up to 55% if the borrower shows steady income or other financial strengths.
- VA and USDA loans: Both programs give lenders room to approve higher DTIs if the borrower’s overall financial profile is strong, such as having a solid credit score or cash reserves.
If your DTI is above conventional limits, government-backed loans may offer a path to approval. Comparing your ratio against each program’s guidelines helps you identify the best fit.
How to Lower Your Debt-to-Income Ratio
Lowering your debt-to-income ratio (DTI) can boost your chances of loan approval and improve your financial stability. Here are practical steps that make the biggest difference.
- Avoid taking on new debt: Delay large financed purchases until after you qualify for a loan. Using credit cards sparingly and paying off balances each month keeps new obligations from raising your DTI.
- Pay down existing debt: Focus on high-interest debts like credit cards first to free up more cash flow. Eliminating smaller debts quickly also helps, since even removing a $100 monthly payment lowers your DTI.
- Refinance loans: Refinancing can cut your monthly payments by reducing your interest rate or extending your loan term. For example, refinancing a $300 car payment down to $250 immediately lowers your ratio.
- Increase your income: Boosting income is just as effective as lowering debt. Options include side jobs like tutoring or rideshare driving, or negotiating a raise at work. If your monthly income grows from $4,000 to $4,500 while debts stay the same, your DTI drops without changing any payments.
Summary of Strategies and Their Impact
- Avoid new debt: Prevents your DTI from rising.
- Pay down debt: Frees up more of your income each month.
- Refinance loans: Lowers required monthly payments.
- Increase income: Improves your ratio by raising the denominator.
Bottom Line
Your debt-to-income ratio is more than a number—it’s a key factor that decides whether you’ll qualify for loans and what terms you’ll get. Keeping it low shows lenders you can manage debt responsibly.
Start by calculating your current ratio, then look for ways to improve it through paying down debt, refinancing, or increasing your income. Even small changes can strengthen your financial profile and put you in a better position for approval when you need it most.
Frequently Asked Questions
How does debt-to-income ratio affect mortgage interest rates?
Your DTI doesn’t directly set your mortgage rate, but it does influence how lenders see you as a borrower. A lower DTI makes you look less risky, which can help you qualify for better rates. A higher DTI can mean stricter conditions or a higher rate to offset the risk.
Is there a difference between front-end and back-end DTI ratios?
Yes, lenders sometimes check both. The front-end ratio looks only at housing costs—mortgage, taxes, and insurance—compared to your income. The back-end ratio includes all debts, like credit cards, auto loans, and student loans, along with housing costs. The back-end ratio is usually the one lenders weigh most heavily.
How often should I check my debt-to-income ratio?
It’s smart to check your DTI whenever you plan to apply for a loan or make a big purchase. Reviewing it a few times a year also helps you see progress as you pay down debt or boost income.
What happens if my DTI changes after preapproval?
If your DTI goes up after preapproval, it could put your loan at risk. Lenders often recheck finances before closing, so it’s best to hold off on new debt or large purchases until the loan is finalized.
Can I exclude certain debts from my DTI calculation?
Some debts may not count toward your DTI, like loans that will be fully paid off in the next six months or debts covered by someone else. Lenders set their own rules, so it’s best to confirm what they include.
How does having a co-borrower affect my DTI ratio?
Applying with a co-borrower means lenders look at both incomes and debts together. If the co-borrower earns more or has little debt, your combined DTI goes down, which can improve your chances of approval.
