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Your debt-to-income ratio, or DTI, plays a big role in how much you can borrow and whether you qualify for a mortgage.
DTI is the percentage of your pretax, or gross income, that goes toward paying debt each month, including a projected mortgage payment if you're applying for a home loan.
Calculate your debt-to-income ratio
Maximum debt-to-income ratio to buy a house
Lenders consider two types of ratios — a front-end DTI and a back-end DTI. The front-end DTI is your projected mortgage payment divided by your gross, or pretax, income. The back-end DTI is your projected mortgage payment, plus all your other monthly debt payments, divided by your gross income.
The DTI calculator gives a figure for the back-end DTI, which gives a fuller financial picture.
An ideal back-end DTI is under 36%. It's possible to qualify for a mortgage with a higher DTI, but you'll likely pay more interest, and your options for qualifying will dwindle with a DTI approaching 50% or more.
How debt-to-income ratio is calculated
Here's the formula for calculating DTI:
Your monthly debt payments / Your monthly gross, or pretax income = DTI
Debts that are included in DTI
Monthly payments for the following are included in the calculation when you're applying for a mortgage:
🤓Nerdy Tip
Include the monthly minimum due on credit cards in the DTI calculator, even if you typically pay more than the minimum.
Costs that are not included in DTI
DTI does not include costs for other items in a typical budget such as:
Cell phone.
Food.
Utilities.
How to lower debt-to-income ratio
Lowering your DTI will improve the odds of qualifying for a mortgage at the best available interest rates. Here are some tips for approaching it.
Avoid increasing expenses if you get a raise or take on a second job. The income boost will lower DTI, but only if you avoid taking on more credit card or other debt.
Use a salary raise or windfall to pay down debt.
Reduce expenses if you can, and use that extra money to pay down debt.
» MORE: How to pay off debt fast: 7 tips
