Debt-to-Income Ratio (DTI)
Definition
The percentage of your gross monthly income that goes toward debt payments. Lenders use DTI to assess your ability to take on and repay new debt, especially for mortgages.
Debt-to-income ratio is a key metric that lenders use to evaluate your creditworthiness. It's calculated by dividing your total monthly debt payments by your gross monthly income. If you earn $6,000/month and pay $2,000/month in debts (mortgage, car loan, student loans, credit card minimums), your DTI is 33%.
There are two types: front-end DTI (housing costs only ÷ income) and back-end DTI (all debt payments ÷ income). For mortgage qualification, most lenders want a front-end DTI below 28% and a back-end DTI below 36%, though some loan programs allow up to 43% or even 50% in certain cases.
DTI is one of the most important factors in mortgage approval. A 45% DTI with a perfect credit score will likely be denied for a conventional mortgage, while a 30% DTI with a fair credit score may be approved. Lenders view DTI as a direct measure of your capacity to handle additional debt.
Improving your DTI involves either reducing debt payments (paying off loans, refinancing to lower payments) or increasing income. The fastest path is usually paying off smaller debts entirely to eliminate their monthly payments. Each debt eliminated reduces both the numerator and improves your overall ratio.
Beyond lending, DTI is a useful personal finance metric. Financial advisors generally recommend keeping total DTI below 36% for financial health. Above 43% is considered "stressed," and above 50% indicates serious over-leveraging that limits financial flexibility.
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Frequently Asked Questions
How do I calculate my debt-to-income ratio?
Add up all monthly debt payments (mortgage/rent, car loan, student loans, credit card minimums, personal loans). Divide by your gross monthly income (before taxes). Multiply by 100 for the percentage. Example: $2,000 debt payments ÷ $6,000 income = 33% DTI.
What DTI do I need for a mortgage?
Most conventional mortgages require a back-end DTI of 36% or less, though some allow up to 43%. FHA loans may allow up to 50% with compensating factors. To improve your chances, pay down debts before applying to lower your DTI as much as possible.