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The debt-to-income (DTI) ratio may not be talked about as much as credit scores, but it plays a big role in your home loan approval. The lower your DTI, the stronger your position as a borrower.
If buying or refinancing a home is in the pipeline, you’ve probably been focused on keeping your credit score strong. But when applying for a home loan, lenders consider more than just credit. They also pay close attention to your debt-to-income (DTI) ratio. Let’s break down DTI—what it is, how it’s measured, and how knowing your number can give you more power as a borrower.
What Is the Debt-to-Income (DTI) Ratio?
The debt-to-income ratio is the percentage of your gross monthly income that goes toward repaying debts, such as mortgages, car loans, student loans, credit card minimums, child support and alimony. What’s not included? Everyday living costs and other expenses like groceries, utilities or insurance premiums.
Why the DTI Ratio Matters in the Homebuying and Refinancing Process
Your debt-to-income (DTI) ratio is one of the key numbers lenders use during underwriting because it shows how much of your income is already committed to debts.
A lower DTI suggests you’ll have an easier time handling a new mortgage payment, while a higher DTI can raise concerns that you may be stretching your budget. Because of this, your DTI can influence whether your loan is approved and what interest rate or terms you’re offered. Lenders want to ensure you’re set up with a mortgage you can comfortably manage long-term.
Two Types of DTI Lenders Use
Lenders look at two versions of your DTI—the front-end and the back-end. Both are important, but they measure different things.
Front-End DTI
Front-end DTI is the housing-only snapshot of your budget. It shows the percentage of your gross monthly income (before taxes) that would go toward:
- Your expected mortgage payment (principal + interest)
- Property taxes
- Homeowners insurance
- Any required HOA fees
How to Calculate Your Front-End DTI
To calculate your front-end DTI, you’ll compare your expected monthly housing expenses to your gross monthly income using the following formula:
Front-End DTI = (Monthly Housing Expenses ÷ Gross Monthly Income) × 100
- Add up your expected monthly housing expenses, including:
- Mortgage payment (principal + interest)
- Property taxes
- Homeowners insurance
- Required HOA dues (if any)
- Find your gross monthly income (before taxes), which can include:
- Wages or salary
- Tips and bonuses
- Pension or retirement income
- Social Security
- Alimony or child support you receive
- Any other steady, verifiable income
- Divide your total housing costs by your gross monthly income.
- Multiply the result by 100 to get your front-end DTI as a percentage.
Example: If your housing costs are $1,400 and your gross monthly income is $5,000: $1,400 ÷ $5,000 = 0.28 × 100 = 28% front-end DTI.
Back-End DTI
Your back-end DTI looks at the bigger picture. It measures how much of your gross monthly income goes toward all recurring monthly debts. It includes housing as well as:
- Credit cards
- Car loans
- Student loans
- Alimony or child support
How to Calculate Your Back-End DTI Ratio
Use the following formula to calculate your back-end DTI ratio, which compares your total monthly debt payments to your gross monthly income.
Back-End DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
- Add up your recurring monthly debt payments, including:
- Mortgage (principal + interest)
- Property taxes and homeowners insurance
- HOA dues (if applicable)
- Car loans or leases
- Student loans
- Credit card minimum payments
- Personal loans
- Alimony or child support you pay
- Find your gross monthly income (before taxes), which can include:
- Wages or salary
- Tips and bonuses
- Pension or retirement income
- Social Security
- Alimony or child support you receive
- Any other steady, verifiable income
- Divide your total monthly debt payments by your gross monthly income.
- Multiply the result by 100 to get your back-end DTI as a percentage.
Example: If your total monthly debt payments add up to $2,000 and your gross monthly income is $5,000: $2,000 ÷ $5,000 = 0.40 × 100 = 40% back-end DTI.
Different DTI Requirements by Loan Type
Different loan programs set their own debt-to-income (DTI) requirements, and in some cases, lenders can approve higher DTIs based on factors like excellent credit, a larger down payment or substantial cash reserves. Here’s a look at some common DTI guidelines by loan type:
| Loan Type | Definition | Maximum DTI |
|---|---|---|
| Conventional Fixed-Rate | Standard conforming loan with predictable payments | Typically 45% (up to 50% with strong credit score, larger down payment or significant reserves) |
| Conventional ARM | Adjustable interest rate after an initial fixed period | Typically 45% (up to 50% with strong credit score, larger down payment or significant reserves) |
| FHA Fixed-Rate | Government-insured loan designed for broader access | Up to 50% and potentially higher, depending on credit score and down payment/loan-to-value ratio |
| FHA ARM | FHA-backed loan with variable rate options | Up to 50% and potentially higher, depending on credit score and down payment/loan-to-value ratio |
| VA Fixed-Rate | Home loan benefit for military service members | 41% is standard, but potentially higher if borrowers meet other income requirements |
| VA ARM | VA-backed loan with adjustable rate structure | 41% is standard, but potentially higher if borrowers meet other income requirements |
| Jumbo Fixed-Rate | Higher amount loans above conforming limits | Typically 45%, plus you’ll need a high credit score and cash reserves |
| Jumbo ARM | Higher amount adjustable-rate loans above conforming limits | Typically 45%, plus you’ll need a high credit score and cash reserves |
| USDA Loan | Zero-down loan program for eligible rural homes, designed for low- to very-low-income applicants | 41% is standard, but may be increased with strong credit, stable employment or proof of savings |
| USDA Refinance | USDA Streamline refinancing program with simplified approval standards | Generally more flexible than purchase USDA loans; DTIs above 41% may be allowed for certain borrowers |
How to Improve Your DTI Before Buying a Home
Did you do the math and feel your debt-to-income ratio is higher than you’d like? The good news is that there are practical steps you can take to bring it down. These strategies can help improve your DTI and show lenders you’re financially ready for a new home loan.
Pay Down Existing Debt
Lower monthly financial obligations mean a lower DTI, so do your best to reduce balances on credit cards, auto loans, student loans or other recurring debts. Consider cutting discretionary spending and redirecting that money toward debt repayment.
Boost Your Income
Whether it’s picking up extra shifts or exploring a side hustle, even small boosts to your gross income can shift your ratio in the right direction.
Avoid Taking on New Debt
Avoid financing large purchases or opening new credit lines before you apply for a home loan. Keeping your monthly obligations steady shows lenders that you are in good financial standing.
Check Your Credit Reports
Errors or outdated accounts can make your debt look higher than it is. You’re entitled to one free credit report annually from each of the three major credit bureaus (Equifax, Experian and TransUnion) at AnnualCreditReport.com. Reviewing your reports and disputing any mistakes helps ensure your DTI is calculated accurately.
What You Might Not Know About DTI
DTI can seem straightforward, but there are a few common misconceptions to keep in mind. Start off the mortgage process prepared and confident by understanding how these details may affect your application.
Student Loans Count–Even If Deferred
Even if your student loans are in deferment or on hold, lenders will include a calculated monthly payment in your DTI. This is because repayment will start at some point in the future, potentially impacting your ability to manage the mortgage.
Only Monthly Payments Matter
Your DTI is based on the monthly payments you’re required to make, not the total balance you owe. Balances are reflected in your credit score, since they influence your credit utilization.
Income Isn’t Just Your Salary
Lenders may also count verifiable bonuses, overtime, self-employment, investment income or child support in the DTI.
DTI Isn’t the Only Qualifying Factor
Your credit score, assets and job stability are equally important when it comes to loan approval.
High DTI Can Still Qualify
A lender may still approve your loan even with a higher DTI if you have a solid credit score or substantial savings.
Certain Debts May Be Excluded
Debts that will be paid off before or at closing, or loans with only a few payments remaining, might not be included in your DTI calculation. Be sure to ask your lender how your specific DTI will be calculated.
A Strong DTI Can Work in Your Favor
There’s a lot that goes into getting approved for a mortgage, and you want to set yourself up for success from the start. With a healthy DTI—ideally 35% or less—you’ll be better positioned for loan approval, have access to more choices and may even secure more favorable terms.
Ready to see how your DTI fits into your home loan options? Contact a Pennymac Loan Expert who can answer your questions and help you explore loans that will work best for you.
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