Understanding Your Debt-to-Income Ratio
Your debt-to-income ratio compares what you owe each month with what you earn. It takes a few minutes to calculate and says a lot about how a lender may view a new payment.
Key takeaways
- Your debt-to-income ratio (DTI) is your total monthly debt payments divided by your gross monthly income, shown as a percentage.
- Mortgage lenders often look at both a housing-only ratio and a total ratio.
- Limits vary by lender and loan type, and lower ratios are generally viewed more favorably.
- DTI is not part of your credit score, but it can matter just as much when you apply.
What debt-to-income ratio measures
Your debt-to-income ratio shows what share of your income is already committed to debt payments each month. A lender uses it to judge whether you could comfortably take on another payment. Your credit score reflects how you have handled debt in the past. Your DTI reflects how much room there is in your budget right now.
How to calculate your DTI
DTI = total monthly debt payments ÷ gross monthly income × 100
Gross income is what you earn before taxes and other deductions come out of your paycheck. If you earn a salary, divide your annual salary by 12. If your income varies, lenders often average it over a longer period, and self-employed borrowers are commonly asked for two years of tax returns.
What usually counts as debt
- Your rent (many lenders count it) or mortgage payment; for a mortgage, that includes property taxes, homeowners insurance and any HOA dues or mortgage insurance
- Minimum required payments on credit cards, not the full balances
- Auto loan and lease payments
- Student loan payments
- Personal loans and other installment loans
- Court-ordered payments such as child support or alimony
What usually does not
Everyday living costs generally are not included: groceries, utilities, phone and internet bills, gas, health insurance premiums and subscriptions. They still matter to your budget, which is why a DTI that looks acceptable on paper can feel tight in real life.
A worked example
Imagine someone who earns $72,000 a year before taxes, or $6,000 a month. Their monthly debt payments look like this:
| Monthly payment | Amount |
|---|---|
| Rent | $1,500 |
| Car loan | $400 |
| Student loan | $250 |
| Credit card minimums | $100 |
| Total | $2,250 |
Dividing $2,250 by $6,000 gives 0.375, so this person's DTI is 37.5 percent.
If they applied for a mortgage, the lender would replace the rent with the proposed new housing payment and recalculate. That is why the same person can have one DTI today and a different one on a mortgage application.
Front-end and back-end ratios
Mortgage lenders often look at two versions of DTI:
- Front-end ratio: housing costs alone, divided by gross monthly income.
- Back-end ratio: all monthly debt payments, including housing, divided by gross monthly income. When people say DTI, they usually mean this one.
You may come across the long-standing 28/36 rule of thumb, which suggests keeping housing costs at or below 28 percent of gross income and total debt payments at or below 36 percent. It is a budgeting guideline, not a rule lenders are bound by. Actual limits depend on the lender, the loan program and the rest of your application, including your credit history and savings.
Why lenders care about DTI
A new loan adds a payment to your budget. If most of your income is already committed, a surprise expense or a drop in income could make every payment harder to keep up with. Lenders use DTI as one way to measure that cushion. It is a useful number for you as well: a lender may be willing to lend more than you would be comfortable repaying, and your own budget should have the final say.
Ways to lower your DTI
Because DTI is a fraction, you can improve it by lowering the top number, raising the bottom one, or both.
- Pay off small balances. Clearing a loan or card entirely removes its monthly payment from the calculation.
- Hold off on new debt. Financing furniture or a car shortly before a mortgage application adds a payment right when it counts.
- Pay down credit cards. Lower balances usually mean lower minimum payments, and they can help your credit utilization too.
- Document all of your income. Regular income from a second job, a side business or other sources may count if you can document it. Lenders set their own rules about how long it must have been received.
- Check your credit reports. A debt that is not yours, or a paid-off loan still showing a balance, could inflate the debts a lender sees.
Refinancing or consolidating debt into a lower monthly payment can reduce your DTI as well, but a longer repayment term can mean paying more interest overall. Look at the total cost, not just the monthly figure.
Helpful official resources
Independent government and official sources. Prequalee is not affiliated with any of these organizations.
- Consumer Financial Protection BureauThe U.S. government agency dedicated to consumer financial protection.
- U.S. Department of Housing and Urban DevelopmentThe federal department responsible for national housing policy.
- Federal Deposit Insurance CorporationThe independent federal agency that insures deposits at member banks.
- AnnualCreditReport.comThe source for free credit reports authorized by federal law.
This guide is general educational information, not financial or legal advice. Lending criteria vary by lender and loan type, so confirm details with any lender you are considering. Spotted something that needs correcting? Email info@prequalee.com.
