What Debt-to-Income Ratio Do You Need for a Mortgage?
6 Min Read | Published: May 29, 2024
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Your debt-to-income (DTI) ratio compares your monthly debt expenses to your earnings. Learn what debt-to-income ratio you need for a mortgage.
At-A-Glance
- Your debt-to-income (DTI) ratio is a crucial factor when applying for a mortgage, with lenders typically preferring a DTI ratio that’s below 43%.1
- Paying down debts and increasing your income are two ways to improve your DTI ratio.
- Different loan types will have different maximum DTI ratios. Some loans allow for DTI as high as 50% or more, although this will vary, depending on the lender and loan.2
When seeking a mortgage, lenders will examine your financial health, and a key factor in their assessment is your debt-to-income (DTI) ratio. Your DTI ratio is calculated by dividing your monthly debt obligations by your gross monthly income.
Your DTI ratio is a clear indicator of your ability to manage new debt and is critical in determining your eligibility for a home loan. In this article, we’ll look at what DTI ratio you typically need for a mortgage and see tips for lowering your DTI ratio.
How to Calculate Your Debt-to-Income (DTI) Ratio
To determine your DTI ratio, add up all your monthly debt payments, such as credit card bills, loan payments, and other recurring financial obligations. Don’t forget to factor in your prospective mortgage payment as well.
Next, divide this total by your monthly income before taxes or deductions are taken out. The resulting figure represents your DTI ratio, which measures the percentage of your gross monthly income that goes toward paying debts.
(Monthly debt payments / gross monthly income) X 100 = DTI Ratio
Lenders typically prefer borrowers to maintain a debt-to-income ratio below 43%, with an ideal target of around 36% or lower. They may also want to see no more than 28% to 35% of that debt going towards a mortgage payment.3 However, mortgage companies have the flexibility to establish their own qualifying debt ratio thresholds and guidelines for loan approval. Knowing these benchmarks could help you assess your current financial standing and see what steps you might need to take to align with lenders’ requirements.
What Is a Good Debt-to-Income Ratio (DTI)?
Most conventional mortgage lenders cap the DTI ratio at around 43% for conventional loans, so if your DTI is below this, you are in relatively good shape. However, some loans, such as those backed by the Federal Housing Administration (FHA) may allow ratios up to 45% and, in some cases, even as high as 50% for well-qualified borrowers.4
It’s important to note that lenders will consider various factors, including your credit score, loan-to-value ratio, and down payment size when assessing your eligibility as well.
When you’re aiming for mortgage approval, understanding the maximum DTI ratios that lenders typically accept is crucial. To put yourself in the best position for approval, here are some preliminary measures you could take:
- Calculate Your DTI
Compare your total monthly debt payments to your gross monthly income to calculate your DTI.
- Explore Loan Options
Different loan types have varying DTI requirements. Research to find the best fit based on your current financial situation. - Consider Enlisting a Co-Signer
If your DTI is high, you may want to consider enlisting a co-signer. Lenders will evaluate the co-signer’s DTI, potentially increasing your borrowing power or lowering interest rates.
How to Lower Your DTI
Improving your debt-to-income ratio is a key step in improving your eligibility for a mortgage. Remember, a lower DTI not only helps with mortgage eligibility but also positions you for better mortgage terms.
Here are some tips to help you lower your DTI:
- Prioritize High-Interest Debts
Focus on paying down debts with the highest interest rates first as they cost you the most money over time.
For example, if you had credit card debt, auto loan debt, and student loan payments, you could prioritize your debts as follows, paying off the highest-interest debt first:
| Type of Debt | Interest |
|---|---|
| Credit card | 22% |
| Auto loan | 10% |
| Student loan | 6% |
- Make Additional Principal Payments
Whenever possible, make extra payments towards the principal balance of your loans. This decreases the total interest accrued and shortens the loan term.
- Consider Debt Consolidation
If you have multiple debts, consolidating them into a single loan with a lower interest rate might reduce your monthly payments and help lower your DTI.
Remember, reducing your expenses is just one side of the equation.
Here are some short and long-term options to consider for increasing your income:
- Consider Your Employment
If you’ve been excelling at your job, it might be time to negotiate a higher salary. Alternatively, explore the job market for positions that offer better compensation.
- Take On a Part-Time Job or Freelance Work
Diversifying your income sources could improve your income and DTI. Look for opportunities that fit your availability and skillset.
- Invest in Your Education or Professional Development
Acquiring new skills or certifications might lead to promotions or open doors to higher-paying roles.
By striking a balance between earning more and reducing debt, you’ll be on the right track to lowering your DTI and securing a favorable mortgage.
Did you know?
Your DTI doesn’t just influence your ability to secure a mortgage; it also affects the terms of the loan you’re offered. A lower DTI can lead to more favorable mortgage terms.
Frequently Asked Questions
Your debt-to-income ratio is a separate metric that does not directly influence your credit score. However, lenders evaluate your DTI as part of their overall criteria for extending new credit or loan products.5
When it comes to DTI, lower is better. However, lenders may set their own requirements. As an example, if your DTI ratio is closer to 45% than 35%, other factors, such as a substantial down payment or a high credit score, may help improve your eligibility, depending on the loan in question.6
Before applying for a mortgage, assess your credit score, debt-to-income ratio, and how much you can afford for a down payment to get an idea about your eligibility.
The Takeaway
Understanding what debt-to-income ratio you need for a mortgage can give you a good idea about your eligibility. However, different lenders have different requirements so be sure to shop around to find an option that works for you.
1,2,4,6 “How to Get a Loan with a High Debt-to-Income Ratio,” The Mortgage Reports
3 “Debt-to-Income (DTI) Ratio: What’s Good and How To Calculate It,” Investopedia
5 “Debt-to-Income Ratio vs. Debt-to-Credit Ratio,” Equifax
Kaelynn Midgley is a writer and content marketing strategist. She creates practical content on budgeting, saving, investing, taxes, and all aspects of personal finances.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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