Debt-to-Income Ratios
What Is a Debt-to-Income Ratio and Why Does It Matter?
Written by Eddie Cohen – January 22, 2025
Your debt-to-income (DTI) ratio is one of the most important factors lenders consider when evaluating your mortgage application. It shows how much of your income goes toward paying off debts and helps determine your ability to afford a new loan. In this post, we’ll explain what DTI is, how it’s calculated, and what it means for your homebuying journey.
What Is a Debt-to-Income Ratio?
- A percentage that compares your monthly debt payments to your gross monthly income.
- Two types of DTI ratios:
- Front-End DTI: Percentage of income spent on housing expenses (e.g., mortgage payment, property taxes, homeowner’s insurance, mortgage insurance, HOA dues).
- Back-End DTI: Percentage of income spent on total monthly debts (e.g., housing, credit cards, auto loans, student loans).
How to Calculate Your DTI
- Add up all your monthly debt payments (e.g., $1500 for housing, $500 for car loan, $200 for credit cards).
- Divide this number by your gross monthly income (before taxes and deductions).
- Multiply by 100 to get the percentage.
- Example: If your monthly debt is $1,200 and your gross monthly income is $4,000, your DTI is 30%.
Why DTI Matters for Your Mortgage
- Loan Approval: Most lenders have maximum DTI limits for different loan types:
- Conventional Loans: Up to 45-50% (back-end DTI);
- FHA Loans: Up to 50-56% (back-end DTI); Manual Underwriting: Typically, up to 43-45%.
- VA Loans: Flexible, generally up to 41% (back-end DTI) but considers residual income; Manual Underwriting: Typically, up to 41%.
- USDA Loans: Typically, up to 41% (back-end DTI); Manual Underwriting: Typically, up to 29-41% depending on compensating factors.
- Affordability: A lower DTI means you’re less likely to face financial strain with a new mortgage.
Tips to Lower Your DTI
- Pay off smaller debts to reduce monthly obligations.
- Avoid taking on new loans or credit cards before applying for a mortgage.
- Consider increasing your income through side jobs or other means.
- Work with a loan officer to explore loan programs with flexible DTI requirements.
Understanding and managing your DTI can make a significant difference in your mortgage approval and the terms you qualify for.
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