Lenders will use your monthly debt totals when calculating your debt-to-income (DTI) ratio, a key figure that determines not only whether you qualify for a mortgage but how large that loan can be. This ratio measures how much of your gross monthly income is eaten up by your monthly debts. Most mortgage lenders want your monthly debts to equal no more than 43% of your gross monthly income. To calculate your debt-to-income ratio, first determine your gross monthly income. This is your monthly income before taxes are taken out. It can include your salary, disability payments, Social Security payments, alimony payments and other payments that come in each month.
Then determine your monthly debts, including your estimated new mortgage payment. Divide these debts into your gross monthly income to calculate your DTI.
Here’s an example: Say your gross monthly income is $7,000. Say you also have $1,000 in monthly debts, made up mostly of required credit card payments, a personal loan payment and an auto loan payment. You are applying for a mortgage that will come with an estimated monthly payment of $2,000. This means that lenders will consider your monthly debts to equal $3,000.
Divide that $3,000 into $7,000, and you come up with a DTI just slightly more than 42%.
You can lower your DTI by either increasing your gross monthly income or paying down your debts.
How Can Your Debt Affect Getting A Mortgage?
If your DTI ratio is too high, lenders might hesitate to provide you with a mortgage loan. They’ll worry that you won’t have enough income to pay monthly on your debts, boosting the odds that you’ll fall behind on your mortgage payments.
A high DTI also means that if you do quality for one of the many types of mortgages available, you’ll qualify for a lower loan amount. Again, this is because lenders don’t want to overburden you with too much debt.
If your DTI ratio is low, though, you’ll increase your chances of qualifying for a variety of loan types. The lower your DTI ratio, the better your chances of landing the best possible mortgage.
This includes:
- Conventional loans: Loans originated by private mortgage lenders. You might be able to qualify for a conventional loan that requires a down payment of just 3% of your home’s final purchase price. If you want the lowest possible interest rate, you’ll need a strong credit score, usually 740 or higher.
- FHA loans: These loans are insured by the Federal Housing Administration. If your FICO® credit score is at least 580, you’ll need a down payment of just 3.5% of your home’s final purchase price when you take out an FHA loan.
- VA loans: These loans, insured by the U.S. Department of Veterans Affairs, are available to members or veterans of the U.S. Military or to their widowed spouses who have not remarried. These loans require no down payments at all.
- USDA loans: These loans, insured by the U.S. Department of Agriculture, also require no down payment. USDA loans are not available to all buyers, though. You’ll need to buy a home in a part of the country that the USDA considers rural. Rocket Mortgage® does not offer USDA loans.
- Jumbo loans: A jumbo loan, as its name suggests, is a big one, one for an amount too high to be guaranteed by Fannie Mae or Freddie Mac. In most parts of the country in 2024, you'll need to apply for a jumbo loan if you are borrowing more than $766,550. In high-cost areas of the country -- such as Los Angeles and New York City -- you'll need a jumbo loan if you are borrowing more than $1,149,825. You'll need a strong FICO® credit score to qualify for one of these loans.
