What is Debt-to-Income?

Debt-to-income (DTI) is a measure of a home buyer’s monthly cash flow and capacity to repay a mortgage.

A Longer Definition: Debt-to-Income Ratio

Debt-to-income ratio, commonly abbreviated as DTI, measures a home buyer’s ability to manage monthly payments and repay debts to creditors. Along with loan-to-value and credit score, debt-to-income is one of the three pillars of a strong mortgage application.

Mortgage lenders calculate debt-to-income by dividing a buyer’s recurring monthly debts into their gross monthly income, which is income earned before taxes and other deductions are applied.

Recurring debts used in the DTI calculation include minimum monthly payments for:

• Auto loans and car leases
• Student loans not in deferment
• Credit cards and charge cards
• Child support and alimony payments
• Expected future mortgage payments

Debt-to-income calculations do not consider a buyer’s other monthly expenses, which may include groceries, child care, and investment contributions. It also does not account for total household income.

DTI is strictly: how much a person is committed to spending each month compared to how much they earn.

Home buyers with lower debt-to-income ratios are more likely to get their mortgage approved, with most mortgage guidelines enforcing DTI maximums that buyers may not exceed.

Maximum debt-to-income ratios for popular mortgage programs

Mortgage Program	Maximum DTI
Conventional Mortgage	50%
FHA Mortgage	50%
HomeReady Mortgage	50%
Home Possible Mortgage	50%
Conventional 97 Mortgage	50%
VA Mortgage	None
USDA Mortgage	44%

Assumes compensating factors including lower loan-to-value and higher credit scores.

Debt-to-Income Ratio: A Real World Example

First-Time Home Buyer Stories - Debt-to-Income

Imagine a first-time home buyer eager to purchase their dream home. They have 10 percent saved up for a down payment, but during their mortgage application process, the buyer learns their debt-to-income ratio is too high to get approved.

They change strategy. Instead of putting 10 percent down on their future home, the buyer opts for a smaller, 5% down payment and puts the remaining cash toward paying down their credit card balances.

This financial move immediately lowers the first-time buyer’s DTI, and their mortgage gets approved.

Common Questions About Debt-to-Income Ratio

What is a good debt-to-income ratio?

A good DTI ratio is one that allows you to comfortably meet your personal financial goals. For some people, that’s a DTI of 25%. For others, it’s 40% DTI. Find a balance between debt and income that works for your life.

Does my debt-to-income ratio affect my credit score?

No, your debt-to-income ratio is not reflected in your credit score. DTI measures your monthly obligations as a percentage of your income. Credit scores measure how well you pay your obligations.

Can I still get a mortgage with a high debt-to-income ratio?

Yes, plenty of home buyers get mortgage approvals with a higher-than-average debt-to-income ratio. As your DTI increases, however, lenders may require a larger down payment or you may lose access to certain mortgage types.

How can I improve my debt-to-income ratio?

To improve your DTI, increase your income, pay off debts, or do both. Paying down credit cards can reduce monthly minimums and substantially lower your DTI.

Are there any debts that are not included in the DTI calculation?

Yes, regular monthly expenses such as utilities, insurance, and groceries are not considered debts and are not included in your DTI calculation.

I have a car loan with 10 payments remaining. Is it included in my debt-to-income ratio?

No, mortgage lenders do not consider car loans with 10 or fewer payments in a home buyer’s debt-to-income calculation because the payments will end soon. Car leases are not excluded with 10 or fewer payments because a new lease usually begins when an existing car lease ends.

I have 10 child support payments remaining. Are the payments included in my debt-to-income ratio?

No, mortgage lenders will not include child support payments in a debt-to-income calculation when the payment schedule has 10 or fewer payments remaining.

Does co-signing a loan affect my debt-to-income ratio?

Yes, when you co-sign a loan, the loan’s payment is considered part of your recurring monthly debts. Even if you are not the primary borrower, the responsibility for repayment affects your debt-to-income ratio.

Can I exclude co-signed loans from my debt-to-income ratio?

In most cases, co-signed loans cannot be excluded from your DTI calculation unless you provide proof that the primary borrower has made on-time payments for a specified period, typically the prior 12 months or longer.