When you apply for a mortgage, one way your lender will assess your financial capacity to afford your loan is to calculate your debt-to-income ratio or DTI. Your DTI compares your total gross monthly income to your total monthly debt payments.
Different lenders and loan programs have varying DTI requirements. It’s also important to understand that a specific DTI requirement is for the lender’s purpose. You will need to determine your own ratio to ensure you’ll feel financially comfortable making your payment every month.
What is debt-to-income ratio?
The term “DTI” can be confusing because most borrowers have two DTIs, not just one. The two DTIs are known as the “front-end” and the “back-end.”
Your front-end DTI compares your total monthly gross income to your total estimated monthly housing expenses.
Your back-end DTI compares your total monthly gross income to the sum of your total estimated housing expenses and your total monthly minimum payments for your other debts.
Your total monthly gross income is the total amount you earn each month before your income tax withholding and other deductions are taken out of your pay.
Your total estimated monthly housing expense may include:
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The principal and interest (P&I) portions of your mortgage payment
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1/12 of your annual property tax
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1/12 of your annual property, flood and mortgage insurance premiums
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Your monthly condo or homeowners association dues, if any
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Other related costs
Your total monthly minimum payments is the sum of the minimum payments you’re obligated to make each month for your:
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Other debts, including auto loans, credit cards, and student loans
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Any fixed, court-ordered payments, such as child support
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Your estimated payment for your new mortgage
Tip: Note that this sum refers specifically to payments, not the total amount of debt or monthly expenses you have. You can run your own calculation to factor in additional monthly costs that lenders don’t factor.
How to calculate debt-to-income ratio
Front-end ratio: To calculate your front-end DTI, divide your total monthly housing expense by your total gross monthly income.
Back-end ratio: To calculate your back-end DTI, divide your total monthly housing expense and total monthly debt payments by your total gross monthly income.
The results will be decimals that you can convert to percentages.
Here’s an example:
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Your gross monthly income is $6,000
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Your estimated monthly housing expense is $1,200
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Your monthly minimum payments for your other debts total $800
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Your front-end DTI is 1,200 divided by 6,000, which equals .20, or 20%
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Your back-end DTI is 2,000 divided by 6,000, which equals .33, or 33%
Tip: If you’re applying for a mortgage with a co-borrower (such as your spouse), you should use the total monthly gross income, housing expense and minimum debt payments for both borrowers before you calculate your DTIs.
The ’28/36 rule’
It’s often said that in order to qualify for a mortgage, your front-end DTI cannot be more than 28% and your back-end DTI cannot be more than 36%. This is known as the “28/36 rule.”
While this “rule” may be helpful as a general guideline, in practice, it’s not always a fixed requirement.
Instead, the DTIs you’ll need to qualify will be different for different lenders and different types of loans.
The guidelines may also differ from the 28/36 rule if you have a non-occupant co-borrower or your loan is for a second home or an investment (rental) property.
How to improve your DTI
In general, a lower DTI will help you qualify for a mortgage while a higher DTI may prove a barrier to loan approval.
A higher credit score or a larger down payment as a percentage of the home’s value may help you overcome a “too-high” DTI. In this case, you may be charged a higher rate.
If your DTI is too high for you to be approved for the mortgage you want, there are two ways to lower it:
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Increase your monthly income
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Decrease your total monthly debt payments
If neither of those fixes is possible for you right now, you may want to reconsider your mortgage plans. If your DTI is already good to go or you can make some quick changes, a new mortgage may await you.