Debt-to-Income Ratio Explained: What Lenders Look For

When you apply for a mortgage, your credit score gets a lot of attention. But there is another number that matters just as much: your debt-to-income ratio, often shortened to DTI. Understanding it can help you set a realistic budget and strengthen your application before you start house hunting.

What DTI Means

Your debt-to-income ratio compares your monthly debt payments with your gross monthly income, which is your income before taxes. It is expressed as a percentage. Lenders use it to judge whether you can comfortably take on a mortgage payment on top of what you already owe.

Lenders typically look at two versions:

• Front-end ratio: Just your new housing payment, including principal, interest, taxes, insurance and any HOA dues, compared with your income.
• Back-end ratio: Your new housing payment plus all your other monthly debts, such as car loans, student loans, credit card minimums and personal loans.

How to Estimate Yours

1. Add up your monthly debt payments, using the minimum payment shown on each statement.
2. Add the estimated monthly cost of the home you want.
3. Divide that total by your gross monthly income.
4. Multiply by 100 to get a percentage.

Everyday costs like groceries, utilities and phone bills do not count as debts in this calculation, though they still matter for your personal budget. Lenders may also count obligations you might not think of, like co-signed loans, alimony or child support payments, so list everything that appears on your credit report or in a court order. Our mortgage calculator can help you estimate the housing payment part.

Why the Limit Varies

There is no single DTI cutoff for every borrower. The maximum a lender will accept depends on the loan program, your credit, your savings and other factors. A lower ratio generally gives you more options and more breathing room. Different programs, from conventional loans to FHA and VA loans, each have their own guidelines, and your loan officer can tell you how yours fits.

Ways to Improve Your DTI

• Pay down balances: Reducing credit card balances lowers your minimum payments.
• Avoid new debt: Hold off on financing a car or furniture until after you close.
• Pay off small loans: Eliminating a small installment loan can remove a monthly payment entirely.
• Document all income: Make sure lenders see every qualifying source, such as part-time work, bonuses or a co-borrower’s income.
• Adjust your price range: A slightly lower purchase price or larger down payment reduces the housing portion of the ratio.

Families planning a move around the school calendar should start early. Improving your DTI can take a few months, so give yourself time before you need to make offers. Talking with a loan officer a few months ahead lets you see which changes would help most, so you are not guessing about where to focus your effort.

Curious where your numbers land? A FLO Mortgage loan officer can review your income and debts and explain your options. Contact our team to get started.

This article is for general education and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines and program availability. FLO Mortgage, Company NMLS #1835856. Equal Housing Opportunity.