Your debt-to-income (DTI) ratio measures how much of the money you’re bringing home each month needs to get allocated to debts. When you’re applying for a mortgage, this matters to lenders. They want to make sure you have enough free cash to comfortably cover your mortgage. As a result, most lenders have maximum DTI ratios that they’ll allow. 

Why lenders care about your debt-to-income ratio

When you apply for a mortgage, lenders gather up a lot of information about you. They use this info to try and figure out how likely you are to be able to repay what you’re borrowing from them. That’s a big part of why they like to see a steady income stream and a solid credit score, which indicates that you’ve been good about managing past debts.  

As part of their analysis of you, lenders also consider your debt-to-income (DTI) ratio. To calculate this, they’ll usually ask you for information about any financial obligations you have, like:

• Student loan payments
• Auto loan payments
• Medical bill payments
• Minimum monthly payments on any credit cards you have
• Personal loan payments
• Court-ordered child support/alimony or garnishments

Lenders take all of those pieces into consideration, along with the monthly mortgage payment you would theoretically have. If they decide that too much of your income has to get allocated to your debts, they see you as risky. They know you need money left over for things like groceries and utility bills. And if they think you might be stretched too thin, they might deny your application. 

Even if they’re willing to offer you a loan, if they think your DTI ratio is on the high side, they’ll charge you a higher interest rate to offset that risk. 

Calculating DTI

To calculate your debt-to-income (DTI) ratio, use the following formule:

Total monthly debts / Gross monthly income = DTI

Lenders typically express DTI as a percentage, so take the decimal you arrive at and multiply it by 100. That will give you your DTI ratio.

Say, for example, that you and your partner gross $7,000 a month. Your car payment is $300 per month, and you pay $200 each month toward your student loans. Your mortgage payment would be $2,000. To calculate your DTI, you would then crunch the numbers like this:

 ($300 + $200 + $2,000) / $7,000 = 0.357 * 100 = DTI ratio of 35.7%

Lenders will note that DTI ratio and use it as part of their decision-making. It will help them determine if they should approve your mortgage application and, if so, how much interest they’ll charge you. 

Front-end and back-end DTI ratios

Technically, there are two different kinds of DTI ratios:

• Front-end DTI ratio: This only measures how much of your gross income goes toward your housing costs (i.e., rent or mortgage). In our example above, then, the front-end DTI is $2,000 / $7,000 = 28.6%. 
• Back-end DTI ratio: This is the ratio we’ve been talking about that factors in all of your monthly debt obligations. Lenders primarily use this ratio. If you see a DTI requirement on a lender’s website, it’s generally safe to assume they’re referring to the back-end DTI ratio. 

What DTI ratio lenders want to see for a mortgage

If you do a little research yourself, you’ll see a lot of sources point to 36% or below as the ideal DTI ratio. If you can get to or under that mark, your odds of getting your mortgage application approved — and getting a competitive interest rate — go up. 

If your DTI ratio is above 36%, though, you’re not out of luck. Different types of mortgages put their max DTI ratios at different levels:

• Conventional loans: Some conventional loan lenders allow for 43%, 45%, or even 50%. Usually, though, you’ll need to have other compensating factors, like a big amount of money in savings or a large down payment. 
• FHA loans: Loans insured by the Federal Housing Administration (FHA) typically require a DTI ratio of 43% or less. That said, with a credit score of 580 and above and compensation factors, you can potentially go up to 50%. 
• VA loans: For the loans it backs, the Department of Veterans Affairs (VA) says that the borrower’s DTI ratio is only a guide and “should not automatically trigger approval or rejection of a loan.” The VA does, however, say that borrowers with a DTI over 41% should get extra scrutiny from the lender. 
• USDA loans: The U.S. Department of Agriculture (USDA) calls this metric your “total debt (TD)” ratio rather than DTI. The guideline it sets for the loans it backs is 41%, but it will allow some borrowers to exceed that with strong compensating factors. 
• Jumbo loans: Most jumbo loan lenders want to see a DTI ratio of 43% or less. This requirement varies from lender to lender, though, so it’s worth looking around if you want a large mortgage. 

Using your DTI ratio to set yourself up for success 

You can use all of this information to your advantage. Start by calculating your own back-end DTI ratio. 

If you’re already below 36%, you’re in a strong position to start looking at your mortgage options. 

If you’re above that mark — and particularly if you’re over 43% — take a dual-pronged approach. First, work to improve your DTI ratio. That might mean refinancing your car loan to get to a lower monthly payment, or finding a side hustle that adds consistent monthly income. 

Then, since different loan programs have different DTI ratio maximums, start exploring which one might be best for you. In our rate table, you can toggle FHA, VA, and USDA loans on and off (look under “More Filters”). That makes it easier to see what kinds of rates you can expect from different loan programs. 

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