Understanding Your Debt-to-Income Ratio

Understanding Your Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is the percent of your gross monthly income that goes toward required debt payments. This number allows potential lenders to see at a glance whether you are likely to be able to afford additional debt payments.

Types of Debt-to-Income Ratios

  • The front-end debt-to-income ratio looks only at your housing payments. If you don't currently own a house, the lender looks at the proposed payments for the home you are considering buying.
  • The back-end debt-to-income ratio includes your housing payments plus all other monthly debt payments.

Calculating Your Debt-to-Income Ratios

Start by determining your gross monthly income, which is your income before taxes and deductions. You can either divide your annual income by 12, multiply your bi-weekly income by 2.17, or multiply your weekly income by 4.33. If you are planning to purchase a home jointly with your spouse, do the same calculations for your spouse's income and add the results together to get your total household income.

Add up all of your potential housing payments for the home you are looking to buy. This includes not only the mortgage principal and interest, but also monthly costs for homeowner's insurance, mortgage insurance, and property taxes. Then also list your other debt payments, which may include car loan or lease payments, student loan payments, minimum credit card payments, and all other monthly debt payments that appear on your credit report.

Calculate your front-end DTI ratio by dividing your housing payments by your monthly income. Calculate your back-end DTI ratio by dividing your total of all debt payments by your monthly income.

What if Your Debt-to-Income Ratio is Too High?

Lenders vary in the specific DTI ratios they are looking for, but in general, lenders want to see a maximum front-end ratio somewhere between 28% and 31% and a maximum back-end ratio somewhere between 36% and 43%, depending on the lender and loan program. If your ratio is too high, some of these strategies could help you qualify:

  • Increase your income by asking for a raise or getting a part-time job to supplement your current income.
  • Decrease your debt payments by paying off one of your debts completely. This is an especially effective strategy if you have a large debt that you are already close to paying off.
  • Decrease your debt payments by consolidating or refinancing an existing debt with a lower interest rate or longer repayment period, either of which will result in lower monthly payments.