Understanding Debt-to-Income Ratio for a Mortgage - NerdWallet (2024)

Your debt-to-income ratio, or DTI, is as important as your credit score and job stability to qualify for a home loan. A high DTI was the most common primary reason lenders denied mortgage applications in 2022, according to a NerdWallet analysis of the most recently available federal mortgage data.

What is debt-to-income ratio?

Your debt-to-income ratio, or DTI, is the percentage of your monthly gross income that goes toward paying off debt, such as credit cards, car loans and student loans. When you're applying for a home loan, lenders will also include your future monthly mortgage payment in the calculation. DTI generally leaves out other monthly expenses such as food, utilities, transportation costs and health insurance, among others.

Lenders use DTI to gauge the likelihood that you'll be able to pay off a new loan, given other debt obligations, and to decide how much you can borrow.

You’ll want the lowest DTI possible not just to qualify with the best mortgage lenders and buy a home, but also to ensure you can pay your debts and live comfortably at the same time.

Front-end and back-end DTI

Mortgage lenders consider two types of DTI ratios — the front end and the back end.

Front-end ratio

Front-end DTI is your future monthly mortgage payment — including property taxes, home insurance and mortgage insurance — divided by your monthly gross income.

Back-end ratio

The back-end DTI includes all your monthly debt payments — such as credit cards, student loans, personal loans and car loans — in addition to the mortgage payment. Back-end ratios tend to be higher, since they take into account all of your monthly debt obligations.

While mortgage lenders typically look at both types of DTI, the back-end ratio often holds more sway because it takes into account your entire debt load.

Calculate your DTI

How to calculate debt-to-income ratio for a mortgage

DTI ratio examples

Say your monthly gross income is $7,000, and each month you owe $350 on a car loan, $250 on student loans and $200 toward credit cards. Your future monthly mortgage payment, including property tax and insurance, is $1,800.

Your front-end DTI would be the monthly mortgage payment divided by monthly gross income.

$1,800 / $7,000 = 0.26 or 26%.

Your back-end DTI would be the monthly mortgage payment plus the other debt payments ($1,800 + $350 + $250 +$200) divided by monthly gross income:

$2,600 / $7,000 = 0.37 or 37%.

What is a good DTI ratio?

An excellent target for a front-end DTI ratio is below 28%, and a good target for a back-end DTI is below 36%. The average DTI for mortgages closed in the last 30 days from March 26 was 39%, according to ICE Mortgage Technology, a mortgage data provider.

But you can qualify for a mortgage with a higher DTI, although you may pay more interest and have to meet other criteria to offset it. The DTI limit will vary by the lender and type of mortgage.

You’ll want to keep your DTIs as low as possible, regardless of lenders’ limits. Paying down debt will help improve your credit score, and a higher credit score and lower DTI ratio will help you get a better mortgage interest rate.

Maximum and average DTI ratios by mortgage type

Here are general back-end DTI thresholds for conventional and government-backed mortgages. Average DTIs are for mortgages closed in the last 30 days from March 26 and are according to ICE Mortgage Technology.

Requirements vary by lenders, but it will be difficult to get approved with a DTI over 50%.

Average DTI: 37%

FHA loans: 43% without compensating factors

The Federal Housing Administration's guideline is 43% unless there are compensating factors, such as having cash reserves and no other debt besides the mortgage. The maximum DTI is 57%.

Average DTI: 44%

The U.S. Department of Agriculture limits DTI to 41%.

No average DTI data is available.

The U.S. Department of Veterans Affairs requires lenders to apply more scrutiny to a mortgage application when the borrower's DTI is more than 41%.

Average DTI: 44%

DTI isn't a full measure of affordability

Although your DTI ratio is important when getting a mortgage, the number doesn't tell the whole story about what you can afford.

DTIs don't take into account expenses such as food, health insurance, utilities, gas and entertainment, and they count your income before taxes, not what you take home each month.

You’ll want to consider more than what your DTI labels as “affordable” and look at all your expenses compared with your actual take-home income.

If your DTI is high

The higher your DTI ratio, the more likely you are to struggle with qualifying for a mortgage and making your monthly mortgage payments.

Pay off debt

To lower your DTI ratio, pay off as much of your current debt as possible before applying for a mortgage. In most cases, lenders won’t include installment debts like car or student loan payments as part of your DTI if you have just a few months left to pay them off.

Avoid taking on more debt

Don't make any big purchases on credit cards, for example, before you buy a home.

Wait to apply

If your debt-to-income ratio is exceptionally high — say 50% or more — it probably makes sense to wait to make a home purchase until you've reduced the ratio.

Before you sit down with a lender, use a mortgage calculator to help figure out a reasonable mortgage payment for you.

The lower your debt-to-income ratio, the safer you are to lenders — and the better your finances will be.