Debt to Income Ratio Explained and the Numbers Lenders Use
Lenders divide monthly debt payments by gross income to decide what else you can borrow. How to compute yours, which payments count and how to lower it.
A borrower earning $75,000 a year, with a car loan, a student loan and two cards, applies for a mortgage with a $1,900 monthly payment. Their debt to income ratio lands at 43.7%, just over the line many lenders like. Paying off the car loan would bring it to 37.1%. Paying off a card instead would barely move it.
Debt to income ratio, DTI, is the number lenders use to decide whether you can take on another payment. It matters most for a mortgage, but car lenders and personal loan lenders use it too. This piece shows how to compute it, which payments count, and how to bring it down efficiently. The order in which to pay debts off for interest, rather than for a loan application, is in avalanche vs snowball.
The formula
DTI = total monthly debt payments ÷ gross monthly income
Gross income is before tax and deductions. Debt payments are the minimum required payments on everything on your credit report, plus some obligations that are not. The CFPB's explanation of debt to income ratio gives the same definition.
Which payments count
| Counts | Does not count |
|---|---|
| The proposed mortgage payment, including taxes, insurance, mortgage insurance and HOA dues | Your current rent, if you are replacing it |
| Car loans and leases | Utilities, phone, internet |
| Student loans, including a figure for loans in deferment | Car, health and life insurance |
| Minimum payments on credit cards and lines of credit | Groceries, childcare, subscriptions |
| Personal loans, and loans you cosigned | Retirement contributions |
| Child support and alimony you pay | Taxes withheld from pay |
Two of those surprise people. A loan you cosigned for someone else counts as yours, because you are legally on the hook. And a student loan in deferment or on a $0 income-driven payment may still be counted at a calculated amount, often a percentage of the balance, depending on the loan program.
Front-end and back-end ratios
Mortgage lenders use two versions:
- Front-end ratio: the proposed housing payment alone, divided by gross income. The traditional guideline is 28% or less.
- Back-end ratio: housing plus every other debt payment, divided by gross income. This is the one usually called DTI, and the one that most often decides approval.
The thresholds lenders use
| Back-end DTI | What it usually means |
|---|---|
| 36% or less | Comfortable for most lenders; the best terms if the rest of the file is strong |
| 36%–43% | Commonly approved, with less margin |
| 43%–50% | Possible on some programs with strong credit, savings or a large down payment |
| Above 50% | Rarely approved for a mortgage |
Conventional loans sold to Fannie Mae generally allow up to 45% under its standard rules and up to 50% when the automated underwriting system approves the file, according to the Fannie Mae Selling Guide. FHA and VA loans have their own limits and compensating factors. The number that applies to you is the one your loan officer quotes for your program.
A borrower, worked
Gross income is $75,000 a year, $6,250 a month. Current debts, all from the credit report:
| Debt | Balance | Monthly payment | Payment per $1,000 of balance |
|---|---|---|---|
| Car loan | $9,600 | $412 | $42.92 |
| Student loan | $24,000 | $286 | $11.92 |
| Card one, minimum | $3,800 | $95 | $25.00 |
| Card two, minimum | $1,200 | $40 | $33.33 |
| Total | $833 |
Without a mortgage, DTI is $833 ÷ $6,250 = 13.3%. Add the proposed mortgage payment of $1,900, including taxes and insurance: front-end ratio is $1,900 ÷ $6,250 = 30.4%, and back-end is $2,733 ÷ $6,250 = 43.7%.
Which payoff lowers it most
| Pay off | Cash needed | New back-end DTI |
|---|---|---|
| Car loan | $9,600 | 37.1% |
| Card one | $3,800 | 42.2% |
| Card two | $1,200 | 43.1% |
The column that matters is payment per $1,000 of balance. The car loan removes $42.92 of monthly payment for every $1,000 paid, so it moves the ratio most per dollar. The student loan, with a long term and low payment relative to its balance, would be the worst use of cash for this purpose. That is the opposite of the order you might choose to save interest, which is why the two goals need separate plans.
Paying down a card without clearing it moves DTI only a little, because the minimum payment falls slowly as the balance falls. It may help your credit score through lower utilization, but it is not the efficient lever for DTI.
DTI for car loans, personal loans and renting
Mortgages are where DTI is most formal, but other lenders use it too, with their own limits.
- Car lenders often look at the back-end ratio including the new car payment, and many also cap the car payment as a share of income. A long loan term lowers the payment and so the ratio, which is one reason 72 and 84-month car loans are common and expensive.
- Personal loan lenders commonly approve up to about 35% to 40%, though limits vary widely. A consolidation loan that pays off several cards can lower your DTI by replacing several minimums with one smaller payment.
- Landlords usually test rent against income instead, often requiring income of about three times the rent. That rule and its limits are in how much rent you can afford.
Because each lender sets its own limit, the same ratio can be approved by one and declined by another. Knowing your number before you apply lets you choose where to apply rather than collecting declines.
Lowering it before you apply
- Clear the debt with the highest payment per dollar of balance, usually a car loan near its end or a small personal loan.
- Ask whether a short-term loan can be left out. Some programs exclude installment debts with only a few payments left, often ten or fewer. Ask your loan officer before paying one off.
- Do not open new credit in the months before applying. A new car payment can sink an approval that was fine a week earlier.
- Document all income. Bonuses, overtime and side income can count if they have a history, usually two years.
- Lower the proposed payment. A larger down payment, a less expensive home or buying discount points reduce the biggest line in the ratio. How much house you can afford works from DTI to a price.
When this does not apply
If you are deciding what you can afford, not what you can borrow. A 43% ratio is calculated on gross pay. After tax, retirement and health deductions, it can mean 60% of take-home pay goes to debt. Use your own budget for the affordability decision, and the lender's ratio only for whether you will be approved.
If you are self-employed. Lenders use income after business expenses from your tax returns, usually averaged over two years. A business with heavy write-offs can show a DTI far higher than the cash it really produces.
If you are struggling with the payments themselves. DTI is a lender's tool. If debt is overwhelming your budget, start with debt consolidation, honestly or a nonprofit credit counselor rather than a new loan.
Next steps
- Pull your credit report and list every debt with its required monthly payment.
- Add any child support, alimony or cosigned loans.
- Divide by gross monthly income, with and without the payment you want to take on.
- Rank debts by payment per $1,000 of balance to find the most efficient payoff.
- Ask a loan officer which DTI limit applies to your loan program before you make any payoff.
