What Is Debt-to-Income Ratio?
You may hear a lender say, “We need to check your debt-to-income ratio,” and wonder what that means for the home you want to buy.
Debt-to-income ratio, or DTI, compares your qualifying monthly debt payments with your gross monthly income. It helps a lender evaluate whether your existing obligations and proposed housing payment fit within a loan program’s requirements.
I’m Paul Mattos with Refine Mortgage and Carolina Home Financing. Here’s how I explain DTI to buyers across the Charlotte area and the Carolinas.
How do you calculate DTI?
Add your qualifying monthly debt payments and your proposed monthly housing payment. Divide that total by your gross monthly income, before taxes and payroll deductions. Multiply by 100 to express the result as a percentage.
For example, suppose you earn $6,000 gross per month and have:
A $400 car payment
A $200 student loan payment
A $100 credit card minimum payment
A proposed $1,700 monthly housing payment
Your monthly obligations total $2,400. Divide $2,400 by $6,000, and your DTI is 40%.
The exact payments a lender must use can depend on the loan program and your documentation. This example shows the calculation, not an approval threshold.
What counts as a monthly debt?
Depending on your situation, a lender may count payments on car loans, credit cards, student loans, personal loans, other mortgages, and required child support or alimony. The proposed payment for the home you’re buying counts too. Fannie Mae’s DTI guidance describes the obligations used for conventional loans.
Lenders generally use the required monthly payment on a credit card, rather than treating its entire balance as a monthly bill. The balance still matters: it can affect the minimum payment and your credit profile.
Student loans deserve a closer look. Even if payments are deferred, a lender may need to calculate a qualifying payment. If you have an income-driven plan, your documentation can make a difference. I explain those situations in How Student Loans Affect Mortgage Approval.
What goes into the proposed housing payment?
For mortgage qualification, the housing expense can include principal, interest, property taxes, homeowners insurance, mortgage insurance if applicable, and HOA dues when applicable. Fannie Mae lists the components of the subject property’s monthly housing expense here.
This is why two homes with the same price can produce different DTI calculations. One might have higher taxes, insurance, or HOA dues. A property-specific estimate is much more useful than calculating with principal and interest alone.
What is a good DTI for a mortgage?
There is no single DTI limit for every borrower or loan. The program, underwriting method, credit profile, and other details affect eligibility.
For example, Fannie Mae’s published conventional guidelines distinguish between manually underwritten loans and loans evaluated through Desktop Underwriter. Government-backed programs have their own requirements. A lender may also apply additional requirements. See Fannie Mae’s current DTI guidance.
A DTI that meets a program limit also does not tell you whether the payment will feel comfortable. The calculation uses gross income, while you make your payment from take-home income and still need money for food, utilities, childcare, repairs, and savings.
Can you improve your DTI before buying?
Sometimes. The right step depends on which obligation is affecting the calculation.
Paying off or reducing a monthly debt may help, but don’t move money or pay off a loan solely to change DTI before discussing the numbers with your lender. You may need that cash for closing or reserves, and a payoff may not help as much as you expect. Documenting the correct student loan payment or qualifying income can also change the result.
Avoid taking on a new car payment, furniture financing, or other debt during the mortgage process without checking with your lender first. New obligations can require your loan to be reviewed again.
Why I look beyond DTI
DTI tells us whether a proposed payment fits an underwriting calculation. It does not show your full cost of owning the home or how much savings you’ll have after closing.
When possible, I prepare a property-specific Total Cost Analysis before an offer goes out. We review the estimated full payment, cash to close, and how the home fits your budget. Hidden Costs of Buying a Home covers expenses to plan for beyond the mortgage calculation.
If you’re buying in Charlotte, Matthews, Concord, Fort Mill, Indian Land, Rock Hill, or a surrounding Carolinas market, a thorough pre-approval can give you a clearer starting point before you shop.
Paul Mattos
Mortgage Broker | Refine Mortgage
Carolina Home Financing
Phone: 980-221-4959
Email: paulm@refinemortgage.net
Schedule a mortgage consultation · Start an application · Read client reviews
