How Debt to Income Ratio (DTI) Affects Mortgages (2024)

FAQs

How Debt to Income Ratio (DTI) Affects Mortgages? ›

Key takeaways

This ratio paints a picture of your financial strength and prevents you from purchasing a home that you may not be able afford. What factors go into your debt-to-income ratio? Essentially, the lower your debt and the higher your income, the more you'll be approved for.

For FHA and VA loans, the DTI ratio limits are generally higher than those for conventional mortgages. For example, lenders may allow a DTI ratio of up to 55% for an FHA and VA mortgage. However, this can vary depending on the lender and other factors.

In addition to your credit score, your debt-to-income (DTI) ratio is an important part of your overall financial health. Calculating your DTI ¹ may help you determine how comfortable you are with your current debt, and also decide whether applying for credit is the right choice for you.

The good news is that debt doesn't automatically bar you from getting a mortgage. However, the amount of money mortgage lenders will be willing to lend you, and the stipulations the money comes with, will depend on the type of debt you owe, the amount of it, and how you got it.

Ideally, your front-end HTI calculation should not exceed 28% when applying for a new loan, such as a mortgage. You should strive to keep your back-end DTI ratio at or below 36%.

Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI. For more on Wells Fargo's debt-to-income standards, learn what your debt-to-income ratio means.

35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.

Key takeaways

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

How does debt factor into mortgage? ›

Your debt-to-income (DTI) ratio is a key factor in getting approved for a mortgage. Most lenders see DTI ratios of 36% as ideal. Approval with a ratio above 50% is tough. The lower the DTI the better, not just for loan approval but for a better interest rate.

Generally speaking, most mortgage lenders use a 43% DTI ratio as a maximum for borrowers. If you have a DTI ratio higher than 43%, you probably are carrying too much debt because you are less likely to qualify for a mortgage loan.

Yes, you can qualify for a home loan and carry credit card debt at the same time. But before you start the homebuying process, you'll need to understand how credit card debt impacts your creditworthiness — this can help you decide whether it makes sense to pay down your credit card debt before buying a house.

Different mortgages have their own DTI requirements, although precise requirements vary by lender. According to Experian, most lenders want to see a DTI below 43% to qualify for a conventional mortgage – and some may expect to see a DTI of 36% or lower.

Debt-to-income (DTI) ratio: Your DTI ratio is your total monthly debt payments divided by your gross monthly income. If your DTI is above the 45% threshold, your PMI may cost significantly more. Calculate your DTI here. Property occupancy: When you apply for a mortgage, you'll be asked how your property will be used.

How do I calculate my debt-to-income ratio? To calculate your DTI, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.