Common Mistakes That Increase Your DTI

You've worked hard to understand your debt-to-income ratio and implement strategies to improve it. But even with the best intentions, certain financial decisions can undermine your progress and push your homeownership goals further out of reach. Sometimes the quickest way to improve your DTI isn't just knowing what to do—it's avoiding the missteps that can sabotage months or even years of careful planning.

The mistakes outlined below are surprisingly common among first-time homebuyers. Many seem harmless or even necessary in the moment, but they can have an outsized impact on your DTI and your mortgage approval chances. The good news? They're entirely preventable once you know what to watch for. By understanding these pitfalls before you encounter them, you can navigate your path to homeownership with confidence and avoid costly delays.

Taking Out a Car Loan Right Before Applying for a Mortgage

This is one of the most detrimental financial moves you can make when preparing to buy a home. A car loan can increase your total DTI anywhere from 5% to 20% or more, depending on the vehicle price and loan terms. For many would-be homebuyers, a car loan can easily delay their HomeOwner Day until the car is paid off—potentially adding years to their timeline.

Consider this scenario: You're at a 38% DTI and ready to start house hunting within a few months. You decide your current car is too old and finance a new one with a $450 monthly payment. If your gross monthly income is $6,000, that $450 payment adds 7.5 percentage points to your DTI, pushing you to 45.5%—potentially outside acceptable ranges for many loan programs. That new car just delayed your home purchase by several years.

If you need a vehicle, consider buying a less expensive used car with cash, or if you must finance, keep the payment as low as possible and the term short. Better yet, make your current vehicle last until after you've purchased your home.

Only Making Minimum Credit Card Payments

While minimum payments are all that's required to stay current, they also keep you in debt longer and maintain higher DTI ratios. Minimum payments on credit cards are typically calculated as a small percentage of your balance (often 2-3%), which means the payment decreases as you pay down the balance.

By making larger payments, you reduce your balance faster, which eventually lowers your minimum payment and improves your DTI. Even adding an extra $50-100 per month to credit card payments accelerates payoff and can meaningfully impact your DTI within several months.

Not Accounting for All Monthly Obligations

Some first-time buyers miscalculate their DTI by forgetting certain debts. Student loans in deferment still count toward your DTI—lenders typically calculate a payment based on 1% of the outstanding balance even if you're not currently making payments. Co-signed loans count even if someone else makes the payments. Buy now, pay later plans that extend beyond your mortgage application may also be factored in.

Before calculating your DTI or applying for a mortgage, pull your credit report and verify that you've accounted for every debt listed. Surprises during the application process can delay closing or result in denial.

Ignoring Student Loans in Deferment

Student loans deserve special mention because many borrowers assume that loans in deferment or forbearance don't affect their DTI. Unfortunately, lenders still account for these debts. Even if your payment is $0 right now, lenders calculate an estimated payment (typically 0.5-1% of the total balance) and include it in your DTI calculation.

If you have large student loan balances in deferment, this can significantly impact your DTI even though you're not making payments yet. Understanding how your lender will calculate this payment helps you accurately assess your DTI and plan accordingly.

DTI vs. Credit Score: What's the Difference?

First-time homebuyers often confuse debt-to-income ratio with credit score, but they're distinct metrics that measure different aspects of your financial health. Understanding both is crucial because you need strong performance in each area to secure the best mortgage terms.

Your DTI measures affordability—can you afford to take on a mortgage payment given your current income and debt obligations? It's a snapshot of your current financial capacity and your ability to manage monthly payments. A low DTI tells lenders you have room in your budget for a mortgage without overextending yourself.

Your credit score measures reliability—have you historically paid your debts on time and managed credit responsibly? It's based on your payment history, credit utilization, length of credit history, types of credit, and recent credit inquiries. A high credit score tells lenders you're likely to make your mortgage payments on time based on your track record.

You can have an excellent credit score but a high DTI, which might result in mortgage denial because lenders question whether you can afford the payment. Conversely, you could have a low DTI but a poor credit score, which also leads to denial or very high interest rates because lenders see you as unreliable despite having capacity to pay.

For the best mortgage terms—approval at competitive interest rates with favorable conditions—you need both a strong credit score (typically 700 or higher, though 740+ is ideal) and a healthy DTI (ideally under 36%, maximum 43% for most conventional loans). These two metrics work together to paint a complete picture of your creditworthiness and financial capacity.