DTI Ratio Explained
How lenders calculate debt-to-income ratio and why it matters for mortgage approval.
Your debt-to-income ratio, often called DTI, is one of the most important numbers lenders use when deciding whether to approve a mortgage. Even borrowers with strong credit can be denied if their DTI is too high.
What Is a Debt-to-Income (DTI) Ratio?
Debt-to-income ratio measures how much of your monthly income goes toward paying debts. Lenders use it to estimate whether you can comfortably take on a mortgage payment.
DTI is expressed as a percentage. A lower percentage generally indicates less financial strain, while a higher percentage signals higher risk to the lender.
Why Lenders Care About DTI
Mortgage lenders want to ensure that borrowers can manage monthly payments without becoming overextended. DTI helps them assess this risk more accurately than income alone.
- Higher DTI increases default risk
- Lower DTI improves approval odds
- DTI influences loan program eligibility
- Some rates and terms depend on DTI thresholds
Front-End vs Back-End DTI
Lenders often look at two types of DTI ratios.
Measures housing costs only, including principal, interest, taxes, insurance, and sometimes HOA fees.
Includes all monthly debts: housing, credit cards, auto loans, student loans, and other obligations.
How Lenders Calculate DTI
Calculating DTI involves two steps: totaling monthly debt payments and dividing by gross monthly income.
- Add all recurring monthly debts
- Divide by gross monthly income
- Multiply by 100 to get a percentage
For example, if your total monthly debts are $2,500 and your gross income is $6,000, your DTI would be about 41.7%.
Common DTI Limits
Acceptable DTI limits vary by loan type and lender, but some general benchmarks are widely used.
- 36%: Traditional guideline for strong borrowers
- 43%: Common maximum for many loan programs
- 45%–50%: Possible with strong credit or compensating factors
Lenders may allow higher DTIs when borrowers have high credit scores, large down payments, or significant savings.
What Counts as Debt?
Only recurring monthly obligations are included in DTI calculations.
- Mortgage or rent payments
- Auto loans and leases
- Student loans
- Minimum credit card payments
- Personal loans and installment debt
Expenses like utilities, groceries, and insurance premiums not tied to debt are usually excluded.
How to Improve Your DTI
If your DTI is too high, there are several ways to improve it before applying for a mortgage.
- Pay down existing debt
- Avoid taking on new loans
- Increase income where possible
- Choose a smaller loan amount
Understanding your DTI ahead of time can help you adjust debts and avoid surprises during the mortgage approval process.