You're getting ready to apply for a mortgage. Your lender (or maybe an article you read before going to bed) mentions debt-to-income ratio, and now it’s on your mind. Maybe you've been told yours is a little high, or perhaps you want to better understand what it means before walking into a lender’s office.
Your debt-to-income (DTI) ratio is how much of your gross monthly income you use to cover debts. In other words, it’s a signal to lenders of your ability to repay your loan, which is why it’s one of the most important numbers lenders look at in mortgage applications. A high DTI ratio is one of the leading reasons lenders reject mortgage applications, according to a NerdWallet analysis.[1]
In this article, we’ll cover all you need to know about debt-to-income ratios, including how to calculate yours, what lenders consider a “good” ratio for different loan types, and what to do if yours is high.
What is a debt-to-income ratio?
Debt-to-income ratio measures how much of your gross monthly income covers debt payments. It’s often expressed as a percentage, and according to the CFPB, it’s calculated by dividing your total monthly payments by your gross monthly income.[2]
This number tells lenders your ability to manage your monthly debt payments in addition to a mortgage.
Lenders typically look at these two types of DTI during a mortgage application:
- Front-end ratio (housing ratio): This focuses on housing expenses, including mortgage principal and interest, property taxes, homeowners insurance, and HOA fees (if applicable). The front-end DTI shouldn’t exceed 28% of your gross income.
- Back-end ratio (total DTI): All of your monthly debt payments (housing + other loans, such as car, credit cards, personal loans, alimony, and student loans). Lenders usually prefer overall DTI not exceeding 36%.
"Most borrowers don’t realize gross (pre-tax) income is used instead of net," says Denya Macaluso, vice president of residential lending at MSU Federal Credit Union.
"DTI does not account for daily living expenses: food, utilities, insurance, daycare,” Macaluso adds. “This is a crucial reason we might only approve up to 43% DTI ratio, so it doesn't negatively affect cost of living."
How to calculate your DTI
If you want to boost your mortgage approval rate, knowing how to calculate your DTI ratio is important. This number will give you an idea of how lenders will perceive your application, and if it’s high, you can work on lowering your DTI before applying.
Step 1: Add up your monthly debt payments
Start by listing all your monthly debt payments and add them up. This includes car loans, credit card payments, student loans, personal loans, and child support or alimony. You also want to include your estimated mortgage payment, homeowners insurance, and property taxes.
Don’t include general or housing expenses such as groceries, utilities, streaming services, health insurance premiums, childcare, or 401(k) contributions. These are living expenses, not debts, and lenders don't include them in DTI calculations.
For example, Eric and Laura’s total monthly debt payments include:
- Car payment: $420
- Student loan: $280
- Credit card minimums: $150
- Proposed mortgage payment (principal, interest, taxes, insurance): $1,600
Total: $2,450/month
Step 2: Calculate your gross monthly income
Next, determine your total gross monthly income, which is your income before taxes. Keep in mind that lenders will want to verify your income, so the more accurate you can be, the better.
For Eric and Laura, their combined gross annual income is $75,000 ÷ 12 = $6,250/month gross.
Step 3: Divide and convert
Now that you have your total monthly debt payments and gross monthly income, use this formula to calculate your DTI:
- DTI = Monthly debt payments ÷ Gross monthly income
- For Eric and Laura, their back-end DTI would be: $2,450 ÷ $6,250 = 0.392
- Convert to a percentage: DTI = 39.2%
A 39.2% DTI is above the 36% threshold required by most mortgage lenders. However, this doesn’t mean the loan will be denied.
Many lenders will still approve your application if you have strong compensating factors like a good credit score, stable income, or cash reserves.
Note for borrowers with student loans: If you have fewer than 10 months remaining to complete your student loan, Fannie Mae guidelines allow lenders to exclude that debt from the DTI calculation.[3]
What's a good DTI ratio? DTI thresholds by loan type
There's no single universal "good" DTI ratio. What matters is whether your DTI is below or exceeds the threshold for the specific loan type you’re trying to get. Many lenders also consider compensating factors to approve you at a higher ratio.
Here’s a quick overview of the DTI most lenders require for different mortgage programs.
| Loan type | Front-end DTI ratio max | Back-end DTI ratio max | Notes |
|---|---|---|---|
| Conventional (Fannie Mae, manual underwriting) | 28% | 36% (up to 45% with a strong credit score or cash reserves | Up to 50% via automated underwriting (Desktop Underwriter) |
| FHA | 31% | 43% (up to 50% with compensating factors) | More flexible for lower credit scores; mortgage insurance required |
| VA | No strict cap | 41% benchmark | Approval relies heavily on residual income |
| USDA | 29% | 41% (up to 44% with compensating factors) | For rural and eligible suburban areas, income limits apply |
What are compensating factors?
These are positive financial strengths that help offset a DTI ratio higher than required. Think of a high credit score, large cash reserves, stable employment history, or a sizable down payment.
So, how many of these factors do you actually need? It depends on the mortgage you’re applying for and how far above the limit your DTI is. In some cases, one strong compensating factor is enough, while in some situations, you would need multiple variables.
Macaluso points to down payment size as the factor that tends to carry the most weight: "If you have a lot of equity in your home, you’re going to be less likely to default," she explains. "In most cases, your home is your largest asset."
She also flags reserves as a strong secondary factor: Borrowers with meaningful savings can weather a temporary income reduction or unexpected expense.
While some lenders may approve higher DTIs, the 28/36 rule (front-end ≤ 28%, back-end ≤ 36%) remains the gold standard. Below 35% often means less financial stress, more room for unexpected expenses, and favorable interest rates.
How to lower your DTI ratio (before you apply)
If your DTI is high, it’s always smart to find ways to lower the ratio before you apply for a mortgage. Here are some of the best ways to lower your DTI faster:
Pay down revolving debt first
Credit cards are the first place to start for a good reason. Lower balances reduce both your minimum monthly payments and credit utilization, which impacts your credit score. Tackle high-balance or high-minimum payments first.
For example, paying off a credit card with a $100 minimum payment lowers your back-end DTI immediately. For someone earning $6,250 per month, that reduces DTI by about 1.6.
Avoid taking on new debt before applying
Taking new loans can drive up your DTI ratio, which can lead to mortgage denial. That includes opening a new credit card, buying a car, financing a high-ticket purchase, or using buy-now-pay-later services months before a mortgage application.
Lenders typically recheck credit before closing to make sure nothing has changed. New debt can trigger a re-underwrite, potentially changing the loan decision. Talk to your loan officer before taking on new debt during the homebuying process.
Increase your verifiable income
“The biggest income source that clients don’t report is bonuses and overtime pay, as well as income from a second job,” said Matt Schwartz, mortgage broker at VA Loan Network.
Consistent side income, a raise, overtime, or bonuses can also help lower your DTI, especially if you can provide at least two years of documentation. Remember that lenders use gross income, not your take-home pay.
Consider paying off smaller loans entirely
If you’re close to paying off a loan, eliminating it early can improve your DTI. For example, if you have a $245 monthly car payment with four months remaining, paying it off entirely removes that debt from your DTI calculation.
But Fannie Mae allows lenders to exclude installment debts with less than 10 months of payments remaining.[3]
Shop a less expensive home (lower the front-end)
Since your proposed mortgage payment is part of your DTI calculation, buying a less expensive home can help reduce both your front-end and back-end DTI.
What DTI doesn't do (and one thing people confuse it with)
One of the most common misconceptions about DTI is that it affects your credit score. It doesn’t. This is because your credit report doesn’t include your income, the key factor used to calculate DTI ratios.
However, the debts that contribute to your DTI can impact your credit score. The biggest connection is credit utilization, which measures how much of your available credit you’re using.
For example, if you have a credit card with a $5,000 limit and carry a $4,000 balance, your utilization is 80%. If you pay the balance down to $1,000, your utilization drops to 20%, boosting your credit score. Keeping your credit utilization under 30% you can manage credit and debt effectively.[4]
At the same time, reducing that balance can lower your minimum monthly credit card payment, which improves your DTI.
It's also worth clarifying which debts actually move your credit score when you pay them down.
"Paying down a mortgage doesn't really help your credit score, but paying down credit cards does," says Schwartz. These two things tend to move together, which is why paying down revolving debt before applying tends to help both problems simultaneously.
Ready to get prequalified? Best Interest Financial can help you figure out how much home you can afford.
Disclaimer: The information provided in this article is for informational purposes only. It is not intended as legal, financial, investment, or tax advice, and should not be relied upon as such. Consult a licensed financial advisor or tax professional regarding your personal financial situation before making any decisions.
FAQ
What counts toward my DTI and what doesn't?
Monthly debt payments, including car loans, student loans, minimum credit card payments, personal loans, child support, alimony, and your proposed mortgage payment count.
Living expenses don’t count. This includes utilities, groceries, phone bills, streaming services subscriptions, insurance premiums, retirement contributions, or childcare. When in doubt, ask your loan officer what they'll include in the DTI calculation.
Can I get a mortgage with a DTI above 43%?
Yes, but it depends on the loan type you’re applying for and your overall financial profile. FHA loans may approve DTIs up to 50% with compensating factors, while conventional loans using automated underwriting systems can also reach around 50% in some cases. VA loans do not have a strict cap and instead focus heavily on residual income.
Does DTI affect my credit score?
No. This is because credit reports don’t include income, so lenders can’t calculate your DTI. However, debts used to calculate DTI can negatively impact your credit utilization, which can affect your score. Paying down debts can improve your credit and reduce your DTI simultaneously.
How do student loans affect my DTI calculation?
It depends on your repayment plan, lender, and mortgage program you’re applying for. Some lenders use your actual payment from an income-driven repayment plan. Others may calculate the payment using a percentage of the loan balance. However, Fannie Mae allows student loans with fewer than 10 months of remaining payments to be excluded from the DTI calculation. Don’t be afraid to ask your loan officer how they’ll handle yours.
What's the fastest way to lower my DTI before applying for a mortgage?
Paying off high-interest credit card debt tends to move the needle fastest because it reduces your monthly minimums and improves credit utilization at the same time. Paying off a small installment loan entirely can also remove that payment from your DTI.