What Is Debt-to-Income Ratio?

What Is Debt-to-Income Ratio?

Debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward monthly debt payments: DTI = (Total Monthly Debt Payments / Gross Monthly Income) x 100. It is one of the primary qualifying criteria for mortgages, auto loans, and personal loans.

Front-End vs. Back-End DTI

Front-end DTI includes only housing costs: proposed principal, interest, property taxes, homeowners insurance, HOA fees, and PMI. The typical front-end limit is 28% to 31%. Back-end DTI includes all monthly debt obligations. Most conventional loans cap back-end DTI at 43%, though Fannie Mae's automated underwriting may approve up to 50% for borrowers with strong compensating factors.

How Existing Debt Shrinks Your Buying Power

On $6,500/mo income with a 43% max DTI, total debt allowed is $2,795/mo. With $800/mo in existing debt, the max new mortgage payment is $1,995/mo, supporting about a $307,600 loan at 6.75%/30yr. With only $400/mo in existing debt, the max payment rises to $2,395/mo, supporting about $369,300 -- roughly $61,700 more home at the same income and DTI limit.

How to Improve Your DTI

To improve DTI before applying for a loan, you can increase your income or pay down existing debts. Paying off a car loan or reducing credit card balances reduces your minimum monthly debt obligations immediately. Avoid taking on new debt in the months before applying for a mortgage.

Common DTI Mistakes

Using net income instead of gross. DTI is always calculated on gross monthly income, before taxes and deductions.

Forgetting the new mortgage payment counts too. DTI includes the loan you're applying for, not just existing debts.