Your debt-to-income ratio (DTI) is one of the first numbers a mortgage or home equity lender calculates. The formula looks simple, monthly debt payments divided by gross monthly income, but the details of which debts and which income count can move your ratio by several percentage points.
This guide walks through how lenders typically calculate DTI, so there are no surprises when you apply.
The two ratios
- Front-end (housing) ratio: your proposed housing payment divided by gross monthly income. The housing payment includes principal, interest, property taxes, homeowners insurance, mortgage insurance and HOA dues, together known as PITI.
- Back-end (total) ratio: all recurring monthly debt payments, including the new housing payment, divided by gross monthly income.
Most approvals hinge on the back-end ratio. Typical benchmarks:
- 36% is comfortable.
- 43% is a common limit.
- Up to 50% is possible for conventional loans approved through Fannie Mae’s automated underwriting.
- FHA’s baseline is 31% front-end and 43% back-end.
Check your numbers with the DTI calculator.
Income: what lenders count
Gross, not take-home. DTI uses income before taxes, retirement contributions and benefits deductions. This makes lender ratios look lower than your real budget does, which is one reason to aim below the maximum.
Stable and documented. Lenders count income they can document and expect to continue:
- Salary and hourly wages. Verified with pay stubs, W-2s and often a verbal check with your employer.
- Overtime, bonuses and commissions. Usually counted only with about a two-year history, and averaged. A declining trend may be discounted.
- Self-employment income. Typically the average of the last two years’ net income from your tax returns, after business deductions. The same write-offs that lower your taxes also lower your qualifying income.
- Rental income. Often counted at about 75% of gross rent, to allow for vacancies and expenses, or taken from Schedule E of your tax return.
- Alimony, child support, Social Security, pensions and disability income. Counted when documented and expected to continue, usually for at least three years for support payments.
Debts: what lenders count
Lenders generally start from your credit report and add obligations that don’t appear on it.
Usually counted:
- Your new housing payment (PITI plus HOA). Your current rent drops out once you buy.
- Other mortgages, HELOCs and home equity loans, including on rental properties. Rental income may offset these.
- Car loans and car leases. Leases are typically counted even when only a few payments remain.
- Student loans, even in deferment or forbearance (see below).
- Credit card minimum payments: the minimum shown on your credit report, not the balance or what you actually pay.
- Personal loans, including “buy now, pay later” loans that are reported.
- Child support and alimony you pay.
- Co-signed loans, unless you can document that the other borrower has made the payments, often for 12 months.
Usually not counted:
- Utilities, phone, internet and streaming.
- Groceries, fuel and other living costs.
- Health, auto and life insurance premiums, except the homeowners insurance in your PITI.
- Income taxes and payroll deductions.
- Medical bills that aren’t in collections or on a payment plan.
Installment loans that are nearly paid off can sometimes be excluded. A common example is a debt with ten or fewer payments remaining whose payment is small relative to your income. Rules vary by program.
How student loans are counted
Student loans are the most common source of DTI surprises, because lenders count them even when your current payment is zero. Common approaches:
- Payment shown on your credit report or repayment plan. Many programs will use a documented income-driven repayment amount, sometimes even $0 under conventional guidelines.
- A percentage of the balance when no payment is reported, or the loan is deferred. For example:
- FHA: 0.5% of the outstanding balance per month.
- Freddie Mac: 0.5%.
- Fannie Mae: 1% of the balance, or a calculated amortizing payment.
- VA loans use their own threshold calculation, and can exclude loans deferred for at least 12 months past closing.
On $60,000 of deferred student loans, a 1% rule adds $600 a month to your debts. At an income of $7,500 a month, that is 8 percentage points of DTI. Guidelines change, so ask your loan officer which rule applies to you.
A worked example
Jordan earns $90,000 a year, or $7,500 a month, and wants a home with a $2,100 PITI payment. Their other payments are a $450 car loan, $300 of student loans and $150 of card minimums.
- Front-end: $2,100 ÷ $7,500 = 28%.
- Back-end: $3,000 ÷ $7,500 = 40%.
Jordan qualifies for most conventional and FHA loans but sits above 36%. Paying off the car loan before applying would bring the back-end ratio to 34%. Alternatively, a $1,800 housing payment would hit 36% with the current debts.
How to improve your DTI before applying
- Eliminate small debts entirely. Removing a payment helps more than paying down part of a large loan. The debt payoff calculator shows which debts you can clear quickly.
- Pay down credit cards. Minimum payments fall with balances, and your credit score often rises too.
- Don’t open new credit in the months before and during the application. That includes car loans, store cards and financed furniture.
- Document all your income. Bring records for side income, rental income and support payments, if you have the history lenders require.
- Consider a co-borrower whose income and debts are counted together with yours.
- Adjust the purchase. A larger down payment or a lower price reduces PITI directly.
DTI for home equity loans and HELOCs
Home equity lenders also cap DTI, commonly around 43% to 50%, including the new payment. For a HELOC, many lenders qualify you on a payment calculated on the full line amount, not just what you plan to draw. See what a line might cost with the HELOC payment calculator, and how much you could borrow with the home equity calculator.
Sources:
- CFPB: What is a debt-to-income ratio?
- Fannie Mae Selling Guide
- HUD/FHA Single Family Housing Policy Handbook
- Regulation Z §1026.43 (ability to repay)