What is debt-to-income ratio?
You've been dreaming about buying your first home for years. You've saved for a down payment, researched neighborhoods, and even browsed listings online. Then you sit down with a lender, and they deliver the disappointing news: "Your DTI is too high for mortgage approval." You leave confused and frustrated, wondering what DTI even means and why this mysterious number is standing between you and homeownership.
Here's the simple answer: Your debt-to-income ratio (DTI) is the percentage of your monthly income that goes toward paying debts. Lenders use this number to assess whether you can realistically afford to take on a mortgage payment alongside your existing financial obligations. A high DTI signals to lenders that you might struggle to manage additional debt, while a lower DTI shows you have room in your budget for a mortgage payment.
Understanding your DTI is one of the most important steps in preparing to buy a home. In this guide, you'll learn exactly what debt-to-income ratio means, how lenders calculate it, and what counts as a "good" DTI for different loan types.
What is Debt-to-Income Ratio (DTI)?
Debt-to-income ratio is a simple calculation that compares how much you owe each month to how much you earn. Lenders calculate your DTI by dividing your total monthly debt payments by your gross monthly income (the amount you earn before taxes and deductions), then multiplying by 100 to get a percentage.
Here's a real-world example: If you earn $5,000 per month and pay $1,500 toward debts (credit cards, car loan, student loans), your DTI is 30% ($1,500 ÷ $5,000 × 100 = 30%).
Lenders care deeply about DTI because it reveals how much of your income is already committed to debt obligations. The higher your DTI, the less room you have in your budget for a mortgage payment. This makes you a riskier borrower in the lender's eyes, which can lead to mortgage denial, higher interest rates, or requirements for a larger down payment.
Your DTI directly affects both mortgage approval and the terms you're offered. Borrowers with lower DTIs typically qualify for better interest rates and more favorable loan terms, which can save tens of thousands of dollars over the life of a mortgage.
Types of Debt-to-Income Ratio
Lenders actually look at two different DTI ratios when evaluating your mortgage application, and understanding both helps you see the complete picture of your financial health.
Front-End DTI Ratio (Housing Ratio)
Your front-end DTI ratio looks exclusively at housing-related expenses. This includes your monthly mortgage payment (principal and interest), property taxes, homeowners insurance, and HOA fees if applicable. Lenders use this ratio to determine if you can afford the housing costs specifically.
Most lenders prefer to see a front-end DTI of 28% or less. This means your total housing costs shouldn't exceed 28% of your gross monthly income. This guideline exists because lenders want to ensure that housing costs alone don't overwhelm your budget, leaving you unable to handle unexpected expenses or other financial obligations.
Back-End DTI Ratio (Total Debt Ratio)
Your back-end DTI ratio is the more comprehensive number and the one most people refer to when discussing DTI. This ratio includes all your monthly debt obligations: your housing costs plus credit card minimum payments, auto loans, student loans, personal loans, alimony, child support, and any other recurring debt payments.
The back-end DTI is what most lenders emphasize during mortgage approval because it shows your complete debt picture. For conventional loans, lenders typically want to see a back-end DTI of 43% or lower, though some borrowers may qualify with DTIs up to 50% with strong compensating factors like excellent credit scores or substantial cash reserves. FHA loans allow for slightly higher DTIs, sometimes up to 50%, while VA loans typically prefer 41% but offer flexibility for qualified veterans.
How to Calculate Your Debt-to-Income Ratio
Calculating your DTI is straightforward once you know what to include. Follow these four simple steps to determine your current debt-to-income ratio.
Step 1: Add up all monthly debt payments
List out every recurring monthly debt obligation. This includes credit card minimum payments (not the full balance, just the required minimum), auto loan payments, student loan payments, personal loan payments, and alimony or child support if applicable. If you're calculating for a mortgage application, include your estimated future mortgage payment, property taxes, and homeowners insurance.
Step 2: Calculate your gross monthly income
Add up all sources of income before taxes and deductions. This includes your salary or wages, bonuses that you receive regularly, commission income, rental property income, alimony or child support received, and any other consistent income streams. If you're self-employed, lenders typically average your income over the past two years.
Step 3: Divide total debts by gross income
Take your total monthly debt payments from Step 1 and divide by your gross monthly income from Step 2. For example: $2,100 in monthly debts ÷ $6,000 gross monthly income = 0.35.
Step 4: Multiply by 100 to get your percentage
Convert the decimal to a percentage by multiplying by 100. Using our example: 0.35 × 100 = 35% DTI.
What Counts Toward Your DTI?
Debts that ARE included:
Credit card minimum payments
Auto loans and leases
Student loans (even those in deferment)
Personal loans
Mortgage payments on other properties
Alimony and child support payments
Home equity loans or lines of credit
Any other installment or revolving debt
Expenses that are NOT included:
Utilities (electric, gas, water)
Groceries and food costs
Health, auto, or life insurance (except mortgage-related insurance)
Cell phone bills
Streaming services and subscriptions
Transportation costs (gas, public transit)
Entertainment and discretionary spending
The key distinction is this: DTI only measures debt obligations, not general living expenses. Lenders assume you'll manage these other costs from the income remaining after debt payments.
What is a Good Debt-to-Income Ratio?
The definition of a "good" DTI varies depending on the type of mortgage loan you're pursuing. Different loan programs have different DTI requirements and flexibility.
Conventional Loans: Most conventional lenders set a maximum DTI of 43%, though many prefer to see 36% or lower. Borrowers with DTIs closer to 36% typically receive better interest rates and more favorable terms. Some conventional loans may allow DTIs up to 50% if you have excellent credit (typically 740 or higher) and significant cash reserves.
FHA Loans: Federal Housing Administration loans are more flexible with DTI requirements, often allowing ratios between 43% and 50%. FHA loans are designed to help first-time buyers and those with less-than-perfect credit, so the higher DTI tolerance reflects this mission. However, DTIs above 43% usually require compensating factors like minimal other debt or a higher credit score.
VA Loans: Department of Veterans Affairs loans typically prefer a DTI of 41% or lower, though the VA doesn't set a strict maximum. Each lender establishes their own requirements, and VA loans offer flexibility for qualified veterans and service members who may have compensating factors that offset a higher DTI.
USDA Loans: United States Department of Agriculture loans, designed for rural homebuyers, generally require a DTI of 43% or lower, similar to conventional loans.
The Ideal DTI Range: While each program has maximums, the ideal DTI for securing the best interest rates and terms is under 36%. Borrowers in this range demonstrate strong financial management and typically face fewer obstacles during the mortgage process. They also have more negotiating power and access to a wider variety of loan products.
Understanding where your DTI falls in relation to these benchmarks helps you gauge your readiness for homeownership and identify whether you need to take steps to improve your ratio before applying.
Why Your DTI Matters for Buying a Home
Your debt-to-income ratio isn't just another number in your financial profile—it's often the deciding factor between mortgage approval and denial, and it significantly impacts the terms you'll receive if approved.
DTI directly affects mortgage approval because it tells lenders how much financial stress you're already under. A borrower with a 50% DTI is committing half their gross income to debt payments before taxes are even deducted. After taxes, healthcare costs, and other necessities, there may be very little cushion for unexpected expenses, raising the risk of missed payments or default.
Beyond simple approval, your DTI influences the interest rate you're offered. Borrowers with lower DTIs pose less risk to lenders, which translates into better rates. The difference between a 3.5% and 4.0% interest rate on a $300,000 mortgage is roughly $90 per month or nearly $32,000 over a 30-year loan. That's a significant amount of money that could go toward building equity instead of paying interest.
DTI also relates to how much you can borrow. Even if you're approved for a mortgage, a high DTI limits your borrowing capacity. Lenders calculate the maximum loan amount based partly on keeping your DTI within acceptable ranges. This means a high DTI might force you to shop in a lower price range than you'd prefer, while a lower DTI gives you more purchasing power.
Consider this real example: Two buyers each earn $80,000 annually ($6,667 monthly gross income). Buyer A has a DTI of 25% with only $1,667 in monthly debts, while Buyer B has a DTI of 40% with $2,667 in monthly debts. Even though they have identical incomes, Buyer A has $1,000 more available each month for a mortgage payment, which could translate to roughly $150,000 more in borrowing power. Buyer A also qualifies for better interest rates, lower insurance requirements, and has more homes within reach.
How GetWyz Helps You Understand Your Path to Homeownership
Understanding your debt-to-income ratio is just one piece of the homeownership puzzle, but it's a critical one. Your DTI interacts with dozens of other financial variables—your credit score, down payment savings, income trajectory, existing debts, and current market conditions—to determine your personalized timeline to homeownership.
This is where GetWyz changes the game for first-time homebuyers. Rather than wondering when you'll be ready to buy or getting generic advice that doesn't account for your unique situation, GetWyz factors in your DTI alongside all your other financial variables to show you your personalized "HomeOwner Day"—the time frame when you'll be ready to purchase a home.
GetWyz helps you see how different financial decisions impact your timeline. Curious how paying off your car loan six months early would change your HomeOwner Day? GetWyz shows you. Wondering whether increasing your 401(k) contributions or putting that money toward debt payoff gets you into a home faster? GetWyz has the answer. By understanding how DTI, savings rate, credit improvements, and income changes interact, you can make informed decisions that optimize your path to homeownership.
The platform transforms homebuying from an overwhelming mystery into a clear, achievable plan with concrete milestones and a definitive target date.
Ready to see when you'll be ready to buy? Join the GetWyz waitlist and discover your personalized HomeOwner Day.
