Key Takeaways
- DTI under 43% improves your mortgage approval chances.
- Lower DTI often leads to better interest rates.
- Calculate DTI by dividing debts by gross monthly income.
- Aim for a DTI under 50% for most mortgage loans.
Article Summary
Debt-to-income (DTI) is a measure of a home buyer's monthly cash flow and capacity to repay a mortgage.
Debt-to-Income Ratio: Explained in Plain English
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.
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.
Debt-to-Income Distribution Among U.S. Home Buyers
| Debt-to-Income Range | Percentage of Buyers |
|---|---|
| <20% | 4.01% |
| 20%-30% | 13.54% |
| 30%-36% | 15.33% |
| 36%-43% | 25.64% |
| 43%-45% | 12.69% |
| 45%-50% | 19.16% |
| >50% | 9.62% |
The Components of Debt-to-Income Ratio
Debt-to-income measures a person's recurring monthly obligations that continue after closing. It does consider one-time expenses or lifestyle costs that may vary month to month.
What's Included in DTI
| Debt Type | How Lenders Treat This Debt |
|---|---|
| Auto loans and car leases | Counted in DTI if payments continue after closing |
| Student loans not in deferment | Counted in DTI |
| Credit cards and charge cards | Minimum monthly payment counted in DTI |
| Child support and alimony | Counted in DTI if court-ordered or required |
| Expected future mortgage payment | Always counted in DTI |
Some debts are not counted in your DTI calculation. For example, if you have a loan or installment debt with fewer than 10 payments left, most lenders will not include that payment in your DTI.
Co-signed loans are another special case. If you co-signed for someone else’s loan, and you can show that the other person has made the last 12 months of payments from their own account, lenders may exclude that debt from your DTI. The same rule applies to business debts if you can prove the business pays the loan from its own funds.
What's Not Included in DTI
| Debt Type | In DTI? | Notes |
|---|---|---|
| Deferred student loan | Sometimes | Program rules vary |
| Auto loan with less than 10 payments | No | |
| Installment loan with less than 10 payments | No | |
| Co-signed loan where the other person pays | No | 12 months proof required |
| Business loan where the business pays | No | Proof required |
| DASH Act Downpayment Assistance | No | Not considered a debt |
If you’re not sure whether a debt counts toward your DTI, ask your lender. Lenders may have different rules or require documentation to exclude certain debts.
DTI Requirements and Mortgage Options
Your debt-to-income ratio determines which mortgage programs you qualify for and whether you get approved for a loan. Each loan program sets specific DTI limits.
Maximum DTI Limits by Mortgage Program
| Mortgage Program | Maximum DTI |
|---|---|
| Conventional Mortgage | 43% |
| FHA Mortgage | 43% |
| HomeReady Mortgage | 50% |
| Home Possible Mortgage | 43% |
| Conventional 97 Mortgage | 43% |
| VA Mortgage | 41% |
| USDA Mortgage | 41% |
Lender Overlays: When Lenders Change The DTI Requirement
Sometimes, mortgage companies establish their own lower maximum DTI requirements to reduce their lending risk. These underwriting choices are called lender overlays.
For example, while FHA loans technically allow up to 57% DTI with compensating factors, many lenders cap FHA loans at 50% DTI. Conventional mortgages may require 43% DTI instead of the program maximum.
Lender overlays vary by company. Some lenders specialize in working with higher-DTI borrowers, while others focus on borrowers with lower debt ratios.
Adding a Co-borrower to Meet DTI Requirements
When your debt-to-income ratio exceeds lender requirements, adding a co-borrower with additional income may help you qualify. Co-borrowers share responsibility for the mortgage payment and appear on the loan documents alongside the primary borrower.
Lenders combine both borrowers' incomes and debts when calculating DTI for co-borrower applications. This approach works well when one borrower has sufficient income but high debt, while the other has lower debt but needs additional income to qualify.
Co-borrowers don't need to live in the home or be related to the primary borrower. Parents, adult children, siblings, or even friends may co-sign mortgages to help first-time buyers qualify for better rates and terms.
Debt-to-Income Ratio: A Real World Example
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
Get answers to frequently asked questions about debt-to-income ratios, including how they affect mortgage approval, what debts are included, and how to improve your DTI.
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 is a DTI of 25%. For others, it is 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 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 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.
