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Debt-To-Income Ratio And Mortgage Eligibility

5-minute read

It’s important to know your debt-to-income ratio (DTI) when you shop for a mortgage. Use our quick guide to understand DTI so you can be prepared when you apply for a mortgage. 

What Is Debt-To-Income Ratio?

Your debt-to-income ratio (DTI) is a percentage that tells lenders how much money you spend 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 will look at two different types of DTI during the mortgage process: front-end and back-end.

Front-End DTI Ratio

Front-end DTI only includes housing-related expenses. This is calculated using your future monthly mortgage payment, including property taxes and homeowners insurance.

Back-End DTI Ratio

Back-end DTI includes all your minimum required monthly debts. In addition to housing-related expenses, back-end debt-to-income ratios 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.

How Do I Calculate My Debt-To-Income Ratio?

To calculate your DTI ratio, add together all of your monthly debts, then divide them by your total gross household income. We’ll use some numbers to illustrate exactly how DTI is calculated.

Step 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
  • Your homeowners insurance premium
  • Any homeowners association fees that are paid monthly
  • Auto loan payments
  • Student loan 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 ratio.

  • 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. 

Step 2: Divide Your Monthly Payments By Your Monthly Gross Income

Your monthly gross 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 add their income, as well as their debts, to 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 monthly gross income.

In this example, let’s say that your monthly gross household income is $3,000. Divide $900 by $3,000 and you get .30, or 30%. That means your DTI is 30%.

See what you’re eligible for.

Rocket Mortgage® uses information about your income, assets and credit to show you which mortgage options make sense for you.

What Is A Good Debt-To-Income Ratio?

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

FHA loans are mortgages backed by the U.S. Federal Housing Administration. FHA loans have more lenient credit and financial requirements. The maximum DTI for FHA loans is 57%, although it’s lower in some cases.

USDA Loans

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%.

DTI 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.

VA Loans

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.

Conventional Loans

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.

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 two-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.

Summary

Your debt-to-income ratio (DTI) – 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. You can use Rocket Mortgage® to see what purchase options you’re eligible for based on your DTI, credit and other factors.  

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