What Is the Debt‑to‑Income (DTI) Ratio?
The debt‑to‑income (DTI) ratio measures how much of your gross (pre‑tax) monthly income goes toward recurring monthly debt payments. Lenders use DTI to assess whether you can afford additional debt. It’s expressed as a percentage:
DTI = (Total monthly debt payments ÷ Gross monthly income) × 100
Key takeaway: lower is better—lenders generally prefer DTI ratios at or below roughly 35–36%, though some loan programs allow higher ratios under specific conditions.
How to Calculate Your DTI Ratio (step‑by‑step)
1. List all recurring monthly debt payments (see “What to include” below).
2. Add those payments together to get Total Monthly Debt Payments.
3. Determine your Gross Monthly Income (pre‑tax income; see “What to include”).
4. Apply the formula: (Total Monthly Debt ÷ Gross Monthly Income) × 100.
5. Example:
– Gross monthly income: $5,000
– Monthly debt payments (credit cards + car + student loans): $1,000
– DTI = ($1,000 ÷ $5,000) × 100 = 20%
If you prefer an automated tool, the Consumer Financial Protection Bureau (CFPB) has an online DTI calculator.
What DTI Includes and Excludes
Debts typically included (count toward the numerator)
– Mortgage or rent payments (for mortgage lending assessments, mortgage principal + interest, property taxes and insurance where applicable)
– Minimum required credit card payments
– Car loan payments
– Student loan payments (including any required forbearance/repayment amount)
– Alimony and child‑support payments if they are required and documented
– Other recurring installment loan payments and contractual obligations
Income typically included (count toward the denominator)
– Gross wages/salary (before taxes)
– Regular bonuses, commissions, tips (if documented and stable)
– Ongoing, verifiable sources such as regular child support and some pension or disability payments
– Self‑employment income, if documented via tax returns or other lender requirements
Debts/expenses typically NOT included
– Utilities, groceries, gas, and other living expenses
– Retirement plan contributions (401(k) deferrals), though lenders may look at take‑home pay
– One‑time, nonrecurring payments and discretionary spending
Income typically NOT included (or only included with strong documentation)
– Unverifiable cash income
– One‑time payments (gifts, inheritances) unless they’re documented as ongoing
– Irregular income without a track record or sufficient documentation
Understanding DTI in Practice
– Lenders often look at two DTI concepts for mortgages:
– Front‑end DTI (housing ratio): percentage of income that goes to housing costs (mortgage principal & interest, property taxes, insurance).
– Back‑end DTI: percentage of income that goes to all monthly debt obligations (this is what’s usually meant by “DTI”).
– Different lenders and loan programs have different maximums and underwriting rules. Government‑sponsored enterprises and major lenders publish their guidelines and allowances for exceptions.
– A high DTI does not automatically mean denial, but it increases the lender’s perceived risk. Lenders may require compensating factors (higher down payment, larger savings, better credit score) for higher DTIs.
Debt‑to‑Income Ratio Guidelines
– Common preferred range: DTI ≤ 35% (many lenders aim for this or 36%).
– Mortgage lending:
– Many lenders will consider DTIs up to 45% under certain conditions (compensating factors).
– Some programs and underwriting approaches allow DTIs up to 50% in narrowly defined cases.
– Agency guidance: Freddie Mac and Fannie Mae generally set an initial target of ~36% with allowances up to ~45% (and in limited underwriting systems, higher) depending on borrower strength and documentation.
– Tip: Check the specific loan program’s DTI limits before applying—requirements differ across conventional, FHA, VA, and portfolio lenders.
Practical Steps to Lower Your DTI (reduce numerator or increase denominator)
Reduce debts (lower the numerator)
1. Pay down high‑interest revolving balances first (credit cards): reduces monthly minimums and interest costs.
2. Make extra principal payments on installment loans when possible.
3. Refinance to lower monthly payments:
– Refinance mortgages to a lower rate or longer term.
– Refinance student loans or auto loans if rates and terms improve monthly payment.
4. Consolidate debts into a single loan with a lower payment (carefully evaluate total interest and term).
5. Negotiate payment plans or lower required payments with lenders for hardship situations.
6. Avoid adding new debt while you’re trying to lower DTI.
Increase your income (raise the denominator)
1. Ask for a raise, take on overtime, or pursue higher‑paying work.
2. Add a part‑time job, freelance work, or side gig with verifiable income.
3. Use documented, recurring sources of income (e.g., child support or rental income) if lenders will accept them—be prepared to provide proof.
4. Add a qualified co‑borrower with income to the application (this increases the denominator but also adds their debt to the numerator—evaluate net effect).
Other practical tips
1. Improve your credit score: a higher score can help secure better interest rates and make lenders more willing to accept a higher DTI.
2. Check your credit reports for errors that could inflate your perceived debt.
3. Build a larger down payment or cash reserves—these compensating factors can make lenders more comfortable with a higher DTI.
4. If you just changed jobs, provide a job offer letter and consistent income documentation; lenders prefer stable employment history.
What to Prepare When Applying for a Loan
– Pay stubs, W‑2s, tax returns (self‑employment), and bank statements to document income.
– Account statements and loan statements showing required monthly payments for all debts.
– Documentation for other income (court orders for child support, rental income leases, etc.).
– Be ready to explain one‑time payments or irregular income sources; lenders may exclude these if they’re not stable.
The Bottom Line
Your DTI ratio is a simple but powerful snapshot of how much of your gross income goes to servicing debt. Lenders use it to evaluate affordability and risk. You can improve your DTI by lowering monthly debt payments, increasing verifiable income, or using compensating strengths such as a higher credit score and larger reserves. Before applying for a loan, calculate your DTI, gather documentation, and take targeted steps to improve your profile if needed.
Sources and Further Reading
– Investopedia — Debt-to-Income (DTI) Ratio: https://www.investopedia.com/terms/d/dti.asp
– Consumer Financial Protection Bureau (CFPB) — DTI calculator: https://www.consumerfinance.gov/owning-a-home/explore-rates-and-fees/mortgage-calculator/
– Freddie Mac — Monthly Debt Payment‑to‑Income (DTI) Ratio: https://sf.freddiemac.com/content/_assets/resources/pdf/pdffiles/sell/index.html (search “DTI” on Freddie Mac resources)
– Fannie Mae — Originating & Underwriting Selling Guide: https://singlefamily.fanniemae.com/media/21681/display
– Wells Fargo — Understanding Your Debt‑to‑Income Ratio: https://www.wellsfargo.com/mortgage/loan-guide/understanding-dti/
If you’d like, I can:
– Calculate your DTI if you provide your monthly debts and gross income, or
– Create a step‑by‑step payoff plan prioritized to reduce your DTI fastest. Which would you prefer?