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Published on July 10, 2025
Debt-to-Income Ratio, or DTI, is a measurement lenders use to evaluate a borrower’s ability to manage monthly payments and repay debts. For anyone looking to buy a home, DTI can be as important as credit score, down payment, and job stability. It’s not just a number — it’s an insight into how financially stretched a borrower may be.
Mortgage underwriters use DTI to assess financial health. If too much of your income is already committed to existing debt, lenders may hesitate to approve your mortgage application. But a lower DTI signals that you have room in your budget for new obligations — like a home loan.
View Debt to Income CalculatorThe Debt-to-Income Ratio is a percentage that compares a person’s total monthly debt payments to their gross monthly income. This figure tells lenders how much of your earnings are going toward existing obligations.
There are two types of DTI:
This ratio includes only housing-related expenses, such as mortgage payments (principal and interest), property taxes, homeowners insurance, and any required homeowners association (HOA) fees. It gives lenders insight into how much of your income would be consumed by just the home itself.
The back-end DTI is more comprehensive. It includes housing costs plus all other recurring monthly debt obligations — credit cards, student loans, auto loans, child support, personal loans, and alimony. This is the number most lenders focus on when reviewing a mortgage application.
The formula for DTI is straightforward:
DTI = (Total Monthly Debt Payments / Gross Monthly Income) × 100
When calculating your DTI, only fixed, recurring monthly debt payments are included. This generally includes:
Expenses like groceries, gas, utility bills, entertainment subscriptions, and insurance premiums typically aren’t counted. These costs, while real, are variable and not legally binding debts.
If your total monthly debt is $2,000 and your gross monthly income is $6,000:
DTI = ($2,000 ÷ $6,000) × 100 = 33.3%
This means one-third of your income is committed to debt payments, which is generally acceptable depending on the loan type.
Lenders use DTI thresholds to assess risk. These benchmarks vary slightly depending on the loan program, but general guidance looks like this:
The 28/36 rule is often cited as a safe guideline: spend no more than 28% of gross monthly income on housing, and no more than 36% on total debt.
Lenders use DTI to measure your ability to take on more debt. Even with a strong credit score, high income, and employment stability, a high DTI can be a red flag. It suggests that a borrower might struggle to make new payments.
Here’s how DTI affects the lending decision:
Consider two borrowers earning $5,000 monthly. One has $1,000 in monthly debt payments (20% DTI); the other has $2,500 (50% DTI). The first borrower is far more likely to qualify for a mortgage with favorable terms.
Lowering your DTI can improve your loan approval chances and unlock better mortgage rates. Here are several effective strategies:
Start with high-interest debt or small balances. Two popular payoff strategies include:
Adding to your monthly income reduces your DTI percentage. Consider:
Hold off on financing major purchases or applying for new credit cards while preparing for a mortgage application. New debt increases your DTI immediately.
Combining high-interest debts into one loan with a lower payment can reduce your total monthly debt obligation. Refinancing an existing loan to lower interest rates may also help reduce monthly payments.
While daily expenses aren’t included in DTI, being intentional with spending frees up cash that can be directed toward reducing debt.
View Debt to Income CalculatorNo. DTI is not included in your credit score calculation. However, it is crucial to lenders during the underwriting process.
Yes, especially with government-backed loans like FHA or VA. But higher DTI may require a stronger credit profile, additional documentation, or compensating factors like cash reserves.
FHA loans may allow up to 50% DTI. VA and USDA loans may permit higher DTIs in certain circumstances. Lenders have discretion but will look for other strengths in your application.
Ideally, keep your back-end DTI under 36%. If it’s between 36% and 43%, approval is still possible but terms may vary. Anything over 50% usually requires serious risk mitigation or results in denial.
It suggests that 30% of your gross income goes toward debt. This is generally considered a healthy and manageable level.
This common rule of thumb advises that no more than 28% of gross income should go to housing costs, and no more than 36% to total monthly debts.
Following the 36% DTI rule, your total monthly debts shouldn’t exceed $2,100. If you have no other debts, a lender may approve a mortgage payment around that figure. But if you have other obligations, that total amount must include them.
To quickly estimate your DTI, use online calculators like those offered by Wells Fargo or NerdWallet. For a personalized review, contact Miranda Mortgage for a free consultation.
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