When lenders evaluate your application for a mortgage or refinance, they look at two primary metrics: your credit score and your debt-to-income (DTI) ratio. Your DTI ratio measures the percentage of your gross monthly income that goes toward paying your monthly debt obligations. Lenders use it to determine if you can safely afford a new mortgage payment.
How to Calculate Your DTI Ratio
To calculate your DTI ratio, divide your total monthly debt payments by your gross monthly income (before taxes are taken out). Multiply the result by 100 to get a percentage.
"Formula: DTI Ratio (%) = (Total Monthly Debt Payments / Gross Monthly Income) * 100"
What Counts as Monthly Debt?
Lenders only include minimum payments on recurring debts that appear on your credit report, plus your future housing costs. You should include:
- Monthly mortgage payments (including principal, interest, taxes, and insurance)
- Minimum monthly credit card payments
- Car loan payments
- Student loan payments
- Alimony or child support payments
Do not include everyday living expenses like utilities, groceries, gas, health insurance, or cell phone bills.
Front-End vs. Back-End DTI
Lenders look at two different DTI ratios:
- Front-End DTI (Housing Ratio): The percentage of income that goes exclusively toward future housing costs (mortgage, taxes, insurance, HOA). Most lenders prefer this to be below 28%.
- Back-End DTI (Total Debt Ratio): The percentage of income that covers all debt payments combined (housing costs plus car loans, student loans, cards). Lenders prefer this to be below 36%, though some programs allow up to 43% or even 50% for highly qualified borrowers.
How to Lower Your DTI Ratio
If your DTI ratio is too high, you can lower it by paying off smaller student or car loans, avoiding new credit cards, or asking for a co-signer to increase the total income on your application.