Debt-to-income ratio: What it is and how to calculate it

If you’re applying a mortgage or another type of loan, your debt-to-income ratio will affect your eligibility. Your debt-to-income ratio (DTI) compares your total monthly debt payments with your gross monthly income.  Lenders use this figure to measure whether you’ll be able to afford your mortgage payments alongside your other debt.

A lower DTI can improve your chances of qualifying for a mortgage and may help you qualify for more favorable loan terms. Let’s take a closer look at how your DTI can affect your ability to get a mortgage and the factors that affect your DTI.

Key takeaways:

• Your debt-to-income ratio is the percentage of your gross monthly income that goes toward paying your recurring debts each month.
• Lenders review your DTI to measure your ability to manage monthly payments and to determine your overall mortgage affordability.
• You can improve your DTI by paying down existing debt balances, refinancing current loans to lower your minimum payments, or increasing your gross income before you apply for a mortgage.

What is debt-to-income ratio?

Your debt-to-income ratio, or DTI, is a percentage that tells lenders how much money you spend on monthly debt payments versus how much money you have coming into your household.

Your DTI is a figure that shows the percentage of your gross monthly income used to pay your recurring debts each month. Your gross monthly income refers to the total money you earn before taxes and deductions are taken out of your paycheck.

The result can give you an idea of where your finances stand and how much home you can realistically afford. Lenders want to confirm you can afford your mortgage payments without becoming “house poor,” where your housing costs overwhelm your budget.

Your lender may look at two types of DTI during the mortgage process: front-end and back-end DTI.

Front-end DTI

Your front-end DTI, sometimes called your housing expense ratio, focuses exclusively on your housing costs. This calculation compares your gross monthly income to your anticipated monthly housing expenses. Lenders typically won’t worry about this number when reviewing your mortgage application, except for some exceptions, such as Federal Housing Administration (FHA) loans. However, the result can give you an idea of where your finances stand and how much home you can realistically afford.

Because front-end DTI only considers housing costs, these costs are included in the calculation:

• Mortgage or rent payment
• Property taxes
• Homeowners or renters insurance
• HOA fees

Back-end DTI

Your back-end DTI is a much more comprehensive metric because it includes your proposed housing costs plus all of your other recurring minimum monthly debt obligations.

Back-end DTI includes all of your monthly debt obligations, including:

• Credit card payments
• Student loan payments
• Car notes
• Personal loan payments
• Child support payments

Because it paints a complete picture of your mandatory financial obligations, a healthy back-end DTI proves to lenders that you can balance your monthly budget alongside a new mortgage payment.

The following are not typically included in DTI ratio calculations because they are not debt payments:

• Utility costs
• Health insurance premiums
• Transportation costs
• Savings account contributions
• 401(k) or IRA contributions
• Entertainment, food, and clothing costs

How to calculate debt-to-income ratio

One good thing to do before applying for a loan is to calculate your own DTI ratio. You can easily calculate it at home using a standard debt to income ratio formula.

Debt-to-income ratio formula

To calculate your DTI, simply divide your total monthly debt payments by your gross monthly income. Then, multiply that number by 100 to convert the decimal into a clear percentage.

(Total Monthly Debt Payments ÷ Gross Monthly Income) x 100 = DTI Percentage

Debt-to-income ratio example

Let’s look at a concrete debt-to-income ratio example to see how this works in practice. Suppose you earn a gross salary of $84,000 a year. To find your gross monthly income, divide that by 12, which gives you $7,000 per month.

Next, tally up your minimum recurring monthly debt payments:

• Future mortgage payment (including taxes and insurance): $1,500
• Auto loan: $350
• Student loan: $200
• Minimum credit card payments: $150

When you add these together, your total monthly debt is $2,200.

Now, apply the formula:

$2,200 ÷ $7,000 = 0.314

0.314 x 100 = 31.4%

In this scenario, your DTI is roughly 31.4%.

Use a debt-to-income ratio calculator

If you want to skip the manual math, we highly recommend using a free debt-to-income ratio calculator online. All you have to do is input your gross monthly earnings and list your recurring debt payments. You could also use our home affordability calculator to help you figure out how much house you can afford with your current income and debts.

What counts toward your debt-to-income ratio?

When calculating your DTI, it is incredibly important to distinguish between your actual debts and your everyday living expenses. If you are unsure what is considered debt, reviewing the categories below will help you accurately prepare for your mortgage application.

Debts typically included

Lenders want to see the recurring financial obligations that you are responsible for paying each month. When calculating your DTI, you must include the minimum monthly payments for:

• Rent or existing mortgage payments
• Minimum credit card payments
• Auto loans and leases
• Student loans
• Personal loans
• Home equity loans or home equity lines or credit
• Child support obligations
• Alimony or spousal support
• Other legal debt obligations

Expenses typically excluded

While day-to-day living expenses certainly impact your personal budget, lenders do not include them in your DTI calculation because they can easily fluctuate or be canceled if you face a financial hardship. The following living expenses are not included when calculating your DTI:

• Groceries and dining out
• Utility bills – including electricity, water, gas, and trash
• Health, life, or auto insurance premiums
• Cell phone and internet bills
• Entertainment and streaming subscriptions
• Gas and transportation costs

Income used to calculate DTI

Your DTI is strictly on your gross monthly income. This is the total amount of money you earn before federal and state taxes, retirement contributions, or health care premiums are deducted from your paycheck.

What is a good debt-to-income ratio?

Wondering what type of debt-to-income ratio you’ll need to get a mortgage with a good interest rate? In general, the lower your DTI ratio, the better it looks to lenders. For many loans, the maximum DTI ratio is 43%.

However, requirements vary slightly depending on the specific loan program and the lender you choose, and the industry has established general guidelines to help you gauge where you stand.

36% or less

A DTI of 36% or less is generally viewed as excellent. Borrowers in this range have plenty of wiggle room in their monthly budgets to comfortably handle new debt. If you fall into this tier, you will likely have an easier time qualifying for a mortgage and securing a competitive interest rate.

36% to 43%

This range is acceptable for many standard loan programs. While your debt load is a bit higher, most lenders still view you as a capable borrower, depending on other loan and borrower factors. You may end up paying a slightly higher interest rate, but your DTI won’t likely be a disqualifying factor.

45% to 50%

A DTI between 45% and 50% is generally near the typical maximum threshold for most standard conventional and FHA DTI ratio requirements. While it can still be possible to get a mortgage with a DTI in this range, lenders may require compensating factors to approve your application. Compensating factors might include a remarkably high credit score, a large down payment, or substantial cash reserves in your savings account to offset the added risk of your debts.

Above 50%

Many lenders consider a DTI above 50% more difficult to approve, although some loan programs may allow higher ratios depending on the borrower's overall financial profile. If more than half your income goes to paying debts, it means you pose a greater risk of default. When your DTI is above 50%, lenders will likely encourage you to focus on paying down your balances or increasing your income before applying for a home loan.

Debt-to-income ratio and housing affordability

Your DTI is not just a hurdle to clear for mortgage approval – it can also help you determine your true housing affordability. Understanding how your debt interacts with your income helps ensure that you do not overextend your budget and buy a home you can’t afford.

What is the 28/36 rule?

The 28/36 rule is a classic financial guideline used by both lenders and financial advisors to establish a baseline for affordability. According to this rule:

• Your housing costs should not exceed 28% of your gross monthly income.
• Your total debt - housing costs plus all other debts - should not exceed 36% of your gross monthly income.

While many loan programs allow you to exceed these thresholds, the 28/36 rule can help you confirm that your new mortgage fits comfortably within budget.

How DTI can affect mortgage approval

Your debt-to-income ratio for mortgage applications directly influences your loan options. A lower DTI signals financial flexibility, meaning lenders may offer you a wider variety of loan types, higher borrowing limits, and lower interest rates.

Conversely, a higher DTI may limit the size of the loan you qualify for, meaning you may need to look at more affordable homes or explore specific government-backed programs that offer more lenient debt requirements.

How to lower your debt-to-income ratio

If your DTI is too high to get approved for a mortgage or qualify for a lower interest rate, there are steps you can take to improve it.

Pay down existing debt   

The most direct way to lower your DTI is to eliminate or pay down existing debt. Focus on paying off smaller loan balances and high-interest debt, like credit cards. Because DTI is calculated using your minimum monthly payments, entirely paying off a credit card that requires a $100 monthly payment instantly removes that $100 from your DTI calculation, freeing up cash flow. Even if you can’t fully pay off your credit cards right away, paying down the balance may reduce the minimum monthly payment required.

Refinance to reduce monthly payments

If you have large debts like student loans or an auto loan, consider refinancing them.¹ By securing a lower interest rate or extending the repayment term on those specific loans, you can significantly reduce the minimum monthly payment required.

While refinancing may mean paying more interest over the life of that specific loan, it immediately lowers your current DTI, helping you qualify for a mortgage.

Increase your income

Because DTI is a ratio, raising the income side of the equation automatically lowers your overall percentage. Of course, that can be easier said than done.

You can increase your gross monthly income by negotiating a raise at your current job, taking on extra hours, or starting a reliable side hustle. As long as your debt payments don’t increase, a higher income means a stronger DTI.

FAQ

Here are some of the most common questions home buyers have about managing their debt-to-income ratio.

What is the 33% mortgage rule?

The 33% mortgage rule is a personal finance guideline that suggests that you should dedicate no more than 33% of your gross monthly income to your housing costs. While similar to the 28% portion of the 28/36 rule, the 33% rule offers  slightly more flexibility. Staying beneath this threshold helps ensure you have enough money left over for savings, investments, and daily living.

How quickly can I improve my DTI?

The timeline for improving your DTI depends entirely on your financial strategy. If you have the cash savings to pay off a credit card or auto loan today, your DTI will improve as soon as your creditor reports the $0 balance to the credit bureaus – usually within 30 to 45 days. Increasing your income or steadily paying down existing debt over time is a gradual process.

Does my DTI influence my credit score?

No, your debt-to-income ratio does not directly influence your credit score. Credit bureaus do not track your income, so they cannot calculate your DTI. However, carrying high balances on your credit cards negatively impacts your credit utilization ratio, which is a major factor in your credit score. So, while DTI isn't on your credit report, paying down debt to improve your DTI will simultaneously boost your credit score.

The bottom line

Your debt-to-income ratio is a reflection how much debt you’re carrying relative to your income. This figure impacts your ability to get approved for a mortgage and the interest rate you’re offered. A lower DTI gives lenders the confidence to offer you their best rates and loan terms.

Calculating your DTI can help you determine how much house you can afford. Understanding how your debt relative to your income affects how much house you can afford can help you set yourself up for success in your home buying journey.

If you’re ready to apply for a mortgage, you can see what you may qualify for by contacting Rocket Mortgage.

¹ Refinancing may increase finance charges over the life of the loan.