Debt-to-Income Ratio (DTI) for Conventional Loans: Your Key to Approval

The Debt-to-Income (DTI) ratio is arguably the most critical math conventional lenders use to determine if you qualify for a mortgage. It assesses your financial capacity by comparing your total monthly debt obligations against your gross monthly income.

While factors like credit score tiers and down payment size are vital, DTI is the ultimate gatekeeper. If your DTI is too high, it may prevent loan approval, even with excellent credit.

I. How DTI is Calculated: The Formula

The DTI ratio is calculated by dividing your total monthly debt payments by your Gross Monthly Income (GMI)—your income before taxes or deductions.

(Total Monthly Debts ÷ Gross Monthly Income) x 100 = DTI %

What Counts as Income? (The Denominator)

  • Included: Base salary, hourly wages, reliable bonuses/commissions, self-employment income (2-year average), and verifiable alimony/child support.
  • Requirement: Lenders require proof that this income is stable and likely to continue for at least three years. Review our Documentation Checklist for income verification steps.

What Counts as Debt? (The Numerator)

Lenders look at “Back-End” debt, which includes all recurring monthly obligations:

  • New Housing Expense: Principal, Interest, Taxes, Insurance (PITI), and PMI.
  • Installment Debts: Car loans, student loans, and personal loans.
  • Revolving Debts: Minimum required monthly credit card payments.
  • Other: Alimony, child support, or other court-ordered payments.

II. Conventional DTI Thresholds & Limits

Historically, lenders looked for the “28/36” rule (28% for housing, 36% for total debt). However, modern Fannie Mae and Freddie Mac guidelines are much more flexible.

DTI Tier Threshold Lender Outlook
Ideal / Preferred 36% or Lower Highest approval odds and best mortgage rates.
Standard Maximum 43% – 45% Common for most conventional borrowers with average credit.
Absolute Hard Cap 50% Only allowed with “Approve/Eligible” findings and Compensating Factors.

III. Pushing the Limit: Compensating Factors

If your DTI exceeds 45%, automated underwriting systems (DU/LP) will often require “Compensating Factors” to offset the risk. These include:

  • High Credit Score: A score of 740+ shows you manage debt responsibly despite a high ratio.
  • Significant Cash Reserves: Having 6–12 months of mortgage payments in savings after closing.
  • Large Down Payment: Putting down 20% or more reduces the lender’s risk significantly.

IV. Strategies to Improve Your DTI

If your DTI is currently too high to qualify for the home you want in Overland Park or Kansas City, consider these strategies:

Strategy Action Item
Pay Down High-Payment Debt Prioritize loans with high monthly payments (like car loans) over those with high balances but low payments.
Add a Co-Borrower Including a spouse or family member’s income can drastically lower the overall DTI percentage.
Switch Loan Types If Conventional won’t work, review our FHA vs. Conventional Guide—FHA allows DTIs up to 56.9%.

Pro Tip: Do not open new credit cards or take out new auto loans during the mortgage process, as this will increase your DTI and could disqualify your loan right before closing.

GET A DTI ANALYSIS & PRE-APPROVAL

Expertise & Compliance Statement: This guide was reviewed and approved by Rick Woodruff, a Licensed Mortgage Loan Originator (NMLS #248984). Metropolitan Mortgage is a Licensed Mortgage Lender in Kansas and Missouri and an Equal Housing Opportunity Lender.
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