Debt-To-Income Ratio (DTI): What Is It And How Is It Calculated?
Miranda Crace5-minute read
August 01, 2022
*As of July 6, 2020, Rocket Mortgage® is no longer accepting USDA loan applications.
As you consider buying a home, it’s important to get familiar with your debt-to-income ratio (DTI). If you already have a high amount of debt compared to your income, then moving forward with a home purchase could be risky. Even if you’re prepared to take the leap, you may struggle to find a lender willing to work with your high DTI.
Use our quick guide to understand DTI so that you can evaluate your financial readiness to purchase a home and come prepared when 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 paying off debts versus how much money you have coming into your household. You can calculate your DTI by adding up your monthly minimum debt payments and dividing it by your monthly pre-tax income.
When you apply for a mortgage, you’ll need to meet maximum DTI requirements so your lender knows you’re not taking on more debt than you can handle. Lenders prefer borrowers with a lower DTI because that indicates less risk that you’ll default on your loan.
Your lender may look at two different types of DTI during the mortgage process: front-end and back-end.
Front-end DTI only includes housing-related expenses. This is calculated using your future monthly mortgage payment, including property taxes and homeowners insurance as well as any applicable homeowners association dues.
Back-end DTI includes all your minimum required monthly debts. In addition to housing-related expenses, back-end DTIs include any required minimum monthly payments your lender finds on your credit report. This includes debts like credit cards, student loans, auto loans and personal loans.
Your back-end DTI is the number that most lenders focus on, because it gives them a more complete picture of your monthly spending.
Feeling good about your DTI?
Find out how much you qualify for with Rocket Mortgage.
How To Calculate Debt-To-Income Ratio
To calculate your DTI, add together all your monthly debts, then divide them by your total gross household income. We’ll use some numbers to illustrate.
1. Add Up Your Minimum Monthly Payments
The only monthly payments you should include in your DTI calculation are those that are regular, required and recurring. Remember to use your minimum payments – not the account balance or the amount you typically pay. For example, if you have a $10,000 student loan with a minimum monthly payment of $200, you should only include the $200 minimum payment when you calculate your DTI. Here are some examples of debts that are typically included in DTI:
- Your rent or monthly mortgage payment
- Any homeowners association (HOA) fees that are paid monthly
- Auto loan payments
- Student loan payments
- Child support or alimony payments
- Credit card payments
- Personal loan payments
Certain expenses should be left out of your minimum monthly payment calculation:
- Utility costs
- Health insurance premiums
- Transportation costs
- Savings account contributions
- 401(k) or IRA contributions
- Entertainment, food and clothing costs
Here’s an example showing how to calculate your DTI. Imagine you have the following monthly expenses:
- Rent: $500
- Student loan minimum payment: $125
- Credit card minimum payment: $100
- Auto loan minimum payment: $175
In this case, you’d add $500, $125, $100 and $175 for a total of $900 in minimum monthly payments.
2. Divide Your Monthly Payments By Your Gross Monthly Income
Your gross monthly income is the total amount of pre-tax income you earn each month. Whether you should include anyone else’s income in this calculation depends on who’s going to be on the loan. If someone else is applying with you, then you should factor their income, as well as their debts, into the calculation. Once you’ve determined the total gross monthly income for everyone on the loan, simply divide the total of your minimum monthly payments by your gross monthly income.
3. Convert The Result To A Percentage
The resulting quotient will be a decimal. To see your DTI percentage, multiply that by 100. In this example, let’s say that your monthly gross household income is $3,000. Divide $900 by $3,000 to get .30, then multiply that by 100 to get 30. This means your DTI is 30%.
What Is A Good Debt-To-Income Ratio To Get A Mortgage?
The lower your DTI, the better. In most cases, you’ll need a DTI of 50% or less, but the specific requirement depends on the type of mortgage you’re applying for.
FHA loans are mortgages backed by the U.S. Federal Housing Administration. FHA loans have more lenient credit score requirements. The maximum DTI for FHA loans is 57%, although it’s decided on a case-by-case basis.
USDA loans can only be used to buy and refinance homes in eligible rural areas. To get a USDA loan, you must have a DTI of less than 41%.
USDA loans have a couple of unique requirements. First, you can’t get a USDA loan if your household income exceeds 115% of the median income for your area.
Second, your lender must consider the income of everyone in the household when evaluating your eligibility for a USDA loan. This means they’ll need to verify income for all occupants of the home – even if they aren’t on the loan.
When determining whether your DTI qualifies you for a USDA loan, your lender will only factor in the income and debts of the people on the loan. If there are other occupants in the home, their income will only be considered in determining whether your household meets the income limits. It won’t be factored into your DTI.
Rocket Mortgage® doesn’t offer USDA loans at this time.
VA loans, which are insured by the Department of Veterans Affairs, offer a low-cost way for current and former members of the Armed Forces to buy a home. VA loans don’t require a down payment, and they often have more lenient DTI requirements. You can get a VA loan with a DTI of up to 60% in some cases.
There’s not a single set of requirements for conventional loans, so the DTI requirement will depend on your personal situation and the exact loan you’re applying for. However, you’ll generally need a DTI of 50% or less to qualify for a conventional loan. Under certain circumstances, you may be able to qualify with a DTI as high as 65%, though in a refinance.
How Can I Lower My Debt-To-Income Ratio?
If your DTI is high, there are some strategies you can use to lower it before you apply for a mortgage.
Pay Off Your Smallest Debts
The fastest way to lower your debt-to-income ratio is to eliminate monthly payments. If you can afford it, pay off your smallest outstanding debt in full. You’ll instantly see your DTI fall.
Raise Your Income
Adding a side hustle, picking up a few more hours at your current job or freelancing can offer you a cash injection to lower your DTI. Just keep in mind that you’ll need to be able to prove that the income you’re receiving is regular and will continue. Lenders generally like to see a 2-year history for each income source.
Put Another Person On The Loan
If you’re buying a home with your spouse or partner, your mortgage lender will calculate your DTI using both of your incomes and debts. If your partner has a low DTI, you can lower your total household DTI by adding them to the loan.
However, if your partner’s DTI is comparable to or higher than yours, then adding them to the loan may not help your situation.
If that’s the case or you’re buying a house on your own with a high DTI, you can always ask a family member or close friend to co-sign the mortgage loan with you. When you use a co-signer, lenders will factor in their DTI when reviewing your application, potentially helping you qualify for a larger mortgage or a lower interest rate.
FAQs About Debt-To-Income Ratios
When you’re buying a house, your debt-to-income ratio influences the size of the loan and the interest rate you’ll qualify for. But there’s more to this ratio than meets the eye. Here are a few of the most frequently asked questions about DTI so you can better prepare for the application process.
Is all debt treated the same in my debt-to-income ratio?
Ultimately, your total recurring debt influences your debt-to-income ratio and can improve or lower your chances of getting qualified for a mortgage. The ratio doesn’t weigh the type of debt differently. The more debt you have, the higher your DTI and the harder it may be to qualify for a great loan.
How quickly can I improve my DTI?
Since your DTI is based on the total amount of debt you carry at any given time, you can improve your ratio immediately by repaying your debt. The more aggressively you pay it down, the more you’ll improve your ratio and the better your mortgage application will look to lenders. Alternatively, you can also pick up a job to earn more income.
Should I apply for a home loan with a high DTI?
In limited instances, high debt-to-income ratios mean lenders may be less willing to give you a mortgage loan or may ask you to pay a higher interest rate for the loan, costing you more money. While you can still apply for and receive a mortgage loan with a high DTI, it’s best to look for ways to lower the ratio if possible so you can get a better interest rate.
Does my DTI influence my credit score?
Your debt-to-income ratio does not influence your credit score. It simply gives you a way to see how much of your income each month has to go toward repaying your recurring debt. Having a high DTI doesn’t necessarily mean that your credit score will be low, provided you’re making the minimum payments on time each month.
The Bottom Line
Your debt-to-income ratio – how much you pay in debts each month compared to your gross monthly income – is a key factor when it comes to qualifying for a mortgage. Your DTI helps lenders gauge how risky you’ll be as a borrower.
A DTI of 50% or less will give you the most options when you’re trying to qualify for a mortgage. Apply with Rocket Mortgage and see what mortgage options you’re eligible for based on your DTI, credit and your unique financial situation. You can also give us a call at (833) 326-6018.
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