Your debt-to-income ratio (DTI) is one of the most important numbers in your financial life—yet many people have never calculated it. Lenders use DTI to determine if you can handle more debt, making it crucial for mortgages, auto loans, and credit cards.
In fact, DTI is the number one reason mortgage applications get denied, accounting for about 40% of rejections.
What Is Debt-to-Income Ratio?
Debt-to-income ratio measures how much of your monthly gross income goes toward debt payments. It's expressed as a percentage.
The Basic Formula
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
Example:
- Monthly debt payments: $2,000
- Gross monthly income: $6,000
- DTI: $2,000 ÷ $6,000 = 0.33 = 33%
This person spends 33% of their gross income on debt payments.
💡 Pro Tip: Use gross income (before taxes), not net income. Lenders use gross because tax situations vary.
Two Types of DTI
Lenders often look at two different DTI calculations:
Front-End DTI (Housing Ratio)
Measures only housing-related expenses as a percentage of income.
Includes:
- Mortgage or rent payment
- Property taxes
- Homeowners insurance
- HOA fees (if applicable)
- Private mortgage insurance (PMI)
Formula: Housing Costs ÷ Gross Monthly Income × 100
Example:
- Monthly housing costs: $1,500
- Gross monthly income: $6,000
- Front-end DTI: 25%
Typical limit: 28% or less preferred
Back-End DTI (Total DTI)
Measures all debt obligations as a percentage of income. This is the more important number.
Includes everything in front-end plus:
- Credit card minimum payments
- Auto loans
- Student loans
- Personal loans
- Child support/alimony
- Any other recurring debt payments
Formula: All Debt Payments ÷ Gross Monthly Income × 100
Example:
- Housing costs: $1,500
- Car payment: $400
- Student loans: $300
- Credit card minimums: $200
- Total monthly debt: $2,400
- Gross monthly income: $6,000
- Back-end DTI: 40%
📌 Key Takeaway: Back-end DTI is what most lenders focus on. It shows the complete picture of your debt burden.
What Counts as Debt?
Included in DTI Calculation
| Debt Type | Counts? | Notes |
|---|---|---|
| Mortgage/rent | Yes | Including taxes, insurance, PMI |
| Auto loans | Yes | Monthly payment |
| Student loans | Yes | Even in deferment (use 1% of balance or IBR payment) |
| Credit cards | Yes | Minimum payment, not balance |
| Personal loans | Yes | Monthly payment |
| HELOC/Home equity loans | Yes | Monthly payment |
| Child support/alimony | Yes | Court-ordered payments |
| Co-signed loans | Yes | Even if someone else pays |
NOT Included in DTI
| Expense Type | Counts? | Why |
|---|---|---|
| Utilities | No | Not a debt obligation |
| Cell phone | No | Service, not debt |
| Groceries | No | Variable expense |
| Insurance (non-housing) | No | Not debt |
| Subscriptions | No | Not debt |
| Childcare | No | Not debt |
| Income taxes | No | Calculated from gross |
What's a Good DTI Ratio?
| DTI Range | Rating | Loan Approval Likelihood |
|---|---|---|
| Under 36% | Excellent | Best rates and terms available |
| 36-43% | Good | Most loans still available |
| 43-50% | Fair | Some options, higher rates |
| Over 50% | Poor | Very limited options |
DTI Requirements by Loan Type
| Loan Type | Maximum DTI | Notes |
|---|---|---|
| Conventional mortgage | 43-45% | May go higher with strong factors |
| FHA loan | 43-50% | More flexible, requires mortgage insurance |
| VA loan | 41% guideline | More flexible for veterans |
| USDA loan | 41% | Rural property loans |
| Jumbo loan | 38-43% | Stricter requirements |
| Personal loan | 40-50% | Varies by lender |
| Auto loan | 40-50% | Varies by lender |
⚠️ Warning: Just because you can qualify for a loan doesn't mean you should take it. A DTI near the maximum leaves little room for emergencies.
How to Calculate Your DTI
Step 1: List All Monthly Debt Payments
| Debt | Monthly Payment |
|---|---|
| Mortgage/Rent | $1,500 |
| Car loan | $350 |
| Student loans | $400 |
| Credit card minimums | $150 |
| Personal loan | $200 |
| Total | $2,600 |
Step 2: Calculate Gross Monthly Income
| Income Source | Monthly Amount |
|---|---|
| Salary (before taxes) | $5,500 |
| Side gig | $500 |
| Total | $6,000 |
Step 3: Divide and Multiply
DTI = $2,600 ÷ $6,000 × 100 = 43.3%
This person is at the edge of qualifying for most conventional mortgages.
Why Your DTI Matters
For Mortgage Approval
DTI is a primary factor in mortgage decisions. A high DTI signals that you may struggle to make payments if income drops or expenses rise.
For Interest Rates
Even if approved, a higher DTI often means higher interest rates. Lenders charge more to compensate for increased risk.
For Credit Limits
Credit card companies consider DTI when setting limits. High DTI may result in lower credit lines.
For Financial Health
Beyond lending, DTI is a useful personal metric. A DTI above 40% leaves little margin for saving, investing, or handling emergencies.
How to Improve Your DTI
Two ways to lower DTI: reduce debt payments or increase income.
Strategy 1: Pay Down Debt
Impact: Every $100 less in monthly payments improves DTI
Priority order:
- Pay off smallest debts completely (removes payment from calculation)
- Pay down credit cards (reduces minimum payments)
- Refinance to lower payments
Example:
- Pay off $3,000 credit card with $100/month minimum
- DTI drops from 43% to 41.3%
Strategy 2: Increase Income
Impact: Higher income denominator lowers ratio
Options:
- Ask for a raise
- Take on overtime
- Start a side gig
- Add a co-borrower with income
Example:
- Income increases from $6,000 to $7,000/month
- Same $2,600 debt payments
- DTI drops from 43.3% to 37.1%
Strategy 3: Don't Take On New Debt
Before applying for a mortgage:
- Avoid new car loans
- Don't open new credit cards
- Don't co-sign for others
- Hold off on large purchases
Strategy 4: Refinance Existing Debt
Options:
- Refinance auto loan to longer term (lower payment)
- Consolidate credit cards to personal loan
- Switch to income-driven student loan repayment
Caution: Longer terms mean more interest paid overall, but can improve DTI for mortgage qualification.
DTI and Buying a Home
Before You Apply
- Calculate your current DTI
- Estimate new housing payment (use online calculators)
- Calculate projected DTI with new mortgage
- Aim for back-end DTI under 40%
Example Scenario
Current situation:
- Income: $7,000/month
- Current debts: $800/month (car, student loans, credit cards)
- Current DTI: 11.4%
With new mortgage:
- Proposed mortgage payment: $2,200 (including taxes, insurance)
- New total debts: $3,000/month
- Projected DTI: 42.9%
This would likely qualify, but barely. Consider a less expensive home or paying down existing debt first.
The Sweet Spot
For comfortable homeownership:
- Front-end DTI: Under 28%
- Back-end DTI: Under 36%
- Total housing + all debt: Leaves room for savings and emergencies
📌 Key Takeaway: Qualifying for a mortgage and affording one comfortably are different things. Aim lower than the maximum.
Common DTI Mistakes
1. Forgetting Co-Signed Loans
Even if someone else pays, co-signed debt counts against YOUR DTI. Think carefully before co-signing.
2. Ignoring Student Loans in Deferment
Lenders typically use 1% of the balance or the income-based repayment amount. A $50,000 student loan adds $500/month to your DTI calculation.
3. Taking On New Debt Before Mortgage
That new car or furniture purchase right before applying can push you over the DTI limit.
4. Not Checking DTI Regularly
Your DTI changes as debts are paid down and income changes. Check quarterly to track progress.
5. Using Net Income Instead of Gross
The formula uses gross (pre-tax) income. Using net gives you an artificially high ratio.
Your DTI Action Plan
-
Calculate your current DTI: List all debts and gross income
-
Know your target: Under 36% is excellent, under 43% is acceptable
-
Identify improvement opportunities: Which debts can you pay off or reduce?
-
Create a paydown plan: Focus on debts that will improve DTI most
-
Avoid new debt: Especially before major applications
-
Monitor monthly: Track progress as you pay down debt
-
Consider income growth: Raises and side income help too
-
Check before applying: Verify your DTI meets requirements for your target loan
Your DTI is a snapshot of your debt burden relative to income. Improving it not only helps with loan approval—it gives you more financial breathing room and reduces stress.