What Is Debt-to-Income Ratio?

Your Debt-to-Income Ratio (DTI) measures the percentage of your gross monthly income that goes toward paying debts. Lenders use DTI to assess your ability to manage new debt, like a mortgage, without overextending your finances. A lower DTI signals lower risk, increasing your chances of loan approval.

There are two types of DTI ratios lenders evaluate:

• Front-End Ratio (Housing Ratio): Includes housing-related expenses, such as your mortgage payment, property taxes, homeowners insurance, and any applicable PMI or HOA fees, divided by your gross monthly income.
• Back-End Ratio (DTI): Combines housing expenses with other monthly debt obligations (e.g., credit cards, car loans, student loans) divided by your gross monthly income. The back-end ratio is the primary focus for lenders, as it provides a complete picture of your financial commitments.

How to Calculate Your DTI

Calculating your DTI is straightforward. Follow these steps:

1. Sum Your Monthly Debt Payments: Include only minimum monthly payments for:
   • Housing expenses (mortgage, taxes, insurance, PMI, HOA) for the property you’re buying.
   • Housing expenses for any retained properties (e.g., a current home you won’t sell).
   • Auto loans, student loans, credit card payments, personal loans, child support, or alimony.

   Exclude non-debt expenses like utilities, health insurance, transportation, groceries, or retirement contributions.

2. Divide by Gross Monthly Income: Take your total monthly debt payments and divide them by your gross (pre-tax) household income. If applying with a co-borrower, include their income and debts. Multiply the result by 100 to get your DTI percentage.

Example:

• Monthly debts: $2,000 (including $1,200 housing, $500 car loan, $300 credit card).
• Gross monthly income: $5,000.
• Calculation: ($2,000 ÷ $5,000) × 100 = 40% DTI.

What’s a Good DTI for a Mortgage?

Each loan program has specific DTI limits. Here’s a breakdown:

• FHA Loans: Up to 57%, evaluated case-by-case, ideal for borrowers with moderate credit or income.
• VA Loans: Up to 60%, often more flexible for veterans and military families.
• Conventional Loans: Typically 45–50%, depending on credit, income, and loan type.
• USDA Loans: Up to 41%, designed for low- to moderate-income buyers in rural areas.

A DTI below 36% is generally considered strong, improving your approval odds and potentially securing better loan terms.

Strategies to Lower Your DTI

If your DTI exceeds the maximum for your desired loan, try these approaches:

1. Pay Off High-Impact Debts: Target debts with the highest monthly payments (e.g., credit cards or small personal loans). Paying these off reduces your DTI quickly. Wait 30–60 days for credit reports to update before applying.
2. Increase Your Income: Include a co-borrower’s income (e.g., a spouse or family member) to boost your gross monthly income. Ensure their DTI is low, as their debts will also be factored in. Alternatively, consider a co-signer to strengthen your application.
3. Reduce Monthly Payments: Refinance existing loans (e.g., auto or student loans) to lower monthly payments or consolidate high-interest credit card debt.
4. Avoid New Debt: Don’t take on new loans or credit card balances before applying, as they’ll increase your DTI.

Why DTI Matters

A low DTI not only improves your chances of mortgage approval but can also lead to:

• Lower Interest Rates: Lenders often offer better terms to low-risk borrowers.
• Higher Loan Amounts: A lower DTI may qualify you for a larger mortgage.
• Financial Flexibility: Less debt means more room in your budget for unexpected expenses.

Ready to Apply for a Mortgage?

Since 1997, Metropolitan Mortgage has helped buyers in Kansas, Missouri, and the Midwest secure the right mortgage products. As a family-run business, we’re committed to guiding you through the home-buying process with personalized support.

Get Started: Contact Metropolitan Mortgage to explore your options or calculate your DTI today.