Key takeaways

  • In a lender’s eyes, your debt-to-income ratio (DTI) reflects your ability to pay debts and other obligations. It measures your personal financial abilities by comparing your total debts to overall income, and converting the result into a percentage.

  • Your debt-to-income ratio evaluates all debts. This includes monthly payment amounts on your mortgage, auto loan, credit cards, student loans, and any other revolving credit sources or installment loans. If you lower your overall monthly debt payments or increase your income, you can improve your debt-to-income ratio.

-The debt-to-income ratio a lender will consider as creditworthy depends on a balance of that particular lender’s risk tolerance and your overall credit profile. Most lenders prefer a debt-to-income ratio of about 28% to 36%, while some may approve borrowers with a higher debt-to-income ratio.

Buying a home is one of the largest purchases many Americans ever make. Most new homeowners require lender-approved financing to make the purchase.

If you’re in the market to buy a new home, you might know the criteria lenders use to evaluate mortgage applications. These include credit score and credit history, income and debt, and debt-to-income ratio. No one factor is determinative, but all play a role.

The ideal debt-to-income ratio for a mortgage varies from lender to lender, but a good rule of thumb is: the lower, the better.

How is debt-to-income ratio determined?

Getting approved for a mortgage might feel like a game of chance. Lenders ask for significant information, only to offer a result that you may or may not like.

Lenders may still provide a mortgage loan if you have a debt-to-income ratio of up to 46%.

You don’t have to leave it to chance!

Lenders evaluate many factors to determine whether to grant a mortgage application. While no factor is determinative alone, an above-average – or exceptional – score in one area may offset a below-average score in another.

Generally, lenders consider the following factors when evaluating creditworthiness:

  • Credit score: Credit scores range from 300 to 850. Calculations consider several components, including credit utilization, types of debt and total credit limit.

  • Credit report: Your credit report provides information on how you’ve used the credit available to you, including your record of on-time payments.

  • Income: This includes your total income from all sources, including W-2 wages, child support, maintenance and investments.

  • Debt-to-income ratio: In comparing your debt to income, the lender is considering your total current debts.

  • Loan-to-value ratio: This ratio compares the home’s appraised value to the total amount financed. To determine the ratio, take the mortgage amount and divide it by the appraised value less the down payment amount.

Home loan lenders usually prefer a credit score of about 620 or higher for a conventional home mortgage. You could potentially remedy a lower credit score with a lower debt-to-income ratio.

How to calculate your debt-to-income ratio

Lenders typically want a debt-to-income ratio of 28% on the low end, up to 36% on the high end.

To determine your debt-to-income ratio, start with the total amount of your recurring monthly debt obligations. This includes payments you make on your mortgage, student loans, car payment, credit card bills, any other line of credit or revolving credit obligations, and any child support and maintenance payments.

Then, divide the result by your gross income (i.e., your total pre-tax income).

A formula for determining DTI

For example, let’s imagine that your gross monthly income is $6,000. If your monthly debt obligations total $2,000, your debt-to-income ratio would be 33%.

That tells a lender that a mortgage applicant would be spending about 33% of their total income on debt payments. This likely indicates that the applicant could afford the monthly mortgage payment.

You’ll have noticed that the total debts account for your monthly mortgage payment. As a portion of your total debts, lenders usually prefer that no more than 28% be due to the mortgage. For example, suppose your gross monthly income is $4,000. If your mortgage payment were to be $1,120, it would account for 28% of your total monthly expenditure and fit the lender’s requirement in that regard.

How to improve your debt-to-income ratio

If your finances do not put you in a position to be competitive for a mortgage, you can take steps to improve your chances.

WATCH: How to Calculate Your Debt to Income Ratios (DTI)

You may improve your debt-to-income ratio in one of two ways:

  • Reduce total recurring monthly debts

  • Increase total gross monthly income

Reducing total recurring monthly debts

Reducing debt is much easier said than done. You must make a conscious effort to reduce spending or pay off some debts.

The most manageable first step in achieving this goal is to create a budget – and stick to it long-term. After listing out your recurring debt payments and bills, what remains is your discretionary income.

While you could spend this on things you want, you could divert a portion of your discretionary income to reduce your overall debt burden.

Increasing total gross income

Another way to improve your debt-to-income ratio is to increase your total gross income. To do so, you could:

  • Take on a second job or freelance

  • Work extra hours or work overtime

  • Negotiate a pay raise

  • Complete coursework or licensing to gain new skills, and then get a new job that pays more

Your strategy to improve your debt-to-income ratio may combine these ideas. For example, let’s say you have a debt-to-income ratio of 33% based on a recurring monthly debt of $1,000 and a gross income of $3,000.

Reducing your debt to $750 would lower the ratio to 25%. Similarly, if the debt remains the same but your salary increases to $4,000, your ratio would still be 25%.


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