Debt-to-income ratio (DTI) is your total monthly debt payments divided by gross monthly income. It measures what percentage of your income goes to debt.
Calculation
Total monthly debt payments: $2,500
- Mortgage: $1,500
- Car loan: $400
- Credit card minimum: $300
- Student loan: $300
Gross monthly income: $5,000
DTI = $2,500 / $5,000 = 0.50 = 50% DTI
Lender Standards
Most lenders approve mortgages with DTI below 43%. Some with excellent credit qualify up to 50%, while others require below 36%.
- Below 36%: Excellent, easily approved
- 36-43%: Good, likely approved
- 43-50%: Marginal, approval depends on other factors
- Above 50%: Difficult to approve, seen as overextended
Real Impact
Applying for a $300,000 mortgage at 6% (payment: $1,800):
Scenario A: Current DTI 30%
- New DTI with mortgage: 30% + ($1,800/$5,000) = 30% + 36% = 66%
- Lender verdict: Rejected (exceeds 43% limit)
Scenario B: Current DTI 15%
- New DTI with mortgage: 15% + 36% = 51%
- Lender verdict: Rejected (exceeds 43% limit)
Scenario C: Current DTI 5%
- New DTI with mortgage: 5% + 36% = 41%
- Lender verdict: Approved (within 43% limit)
The same $300,000 mortgage can be approved or rejected based purely on your existing DTI.
Improving DTI
- Pay down existing debt: Reduces numerator
- Increase income: Increases denominator
- Avoid new debt: Prevents denominator growth
Paying off a $300 car loan reduces DTI by 6 percentage points (assuming $5,000 income). Raising income to $6,000 reduces DTI by 8 percentage points.
