What Is a Debt-to-Income Ratio for a Mortgage?
What is a debt-to-income ratio for a mortgage? See a definition of DTI, how to calculate your ratio, and what percentage you’ll need to buy a house.
Your ability to finance a home purchase often hinges on a metric called a “debt-to-income ratio” (DTI) — a percentage that shows how much of your monthly income goes toward debt payments. A debt-to-income ratio for a mortgage is a key that can open — or lock — the door to homeownership.
In this easy-scan post, we provide a simple definition and examples, share how to calculate your DTI ratio, and what percentage you’ll need to buy a house.
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What is a debt-to-income ratio for a mortgage?
Your debt-to-income ratio (DTI) compares your monthly debt payments to your gross monthly income. It’s a percentage that lenders use to assess your ability to handle a mortgage payment alongside your existing financial obligations.
There are two types of DTI ratios:
- Front-end DTI: This includes only housing-related expenses, such as your potential mortgage payment, property taxes, homeowners insurance, and HOA fees. This ratio is also known as HTI or housing expense-to-income ratio.
- Back-end DTI: This includes all monthly debt obligations, such as credit card payments, auto loans, student loans, and personal loans, in addition to housing costs.
Lenders typically focus on your back-end DTI when evaluating your mortgage application. The lower your ratio, the more likely you are to qualify for favorable loan terms.
How is a debt-to-income ratio used in a mortgage?
Lenders use your debt-to-income ratio as a risk assessment tool. The idea is simple: if too much of your income is already committed to debt payments, adding a mortgage could strain your finances.
Here’s how DTI affects your mortgage application:
- Loan approval: Most conventional lenders prefer a back-end DTI of 43% or lower, though some allow higher ratios depending on the loan type.
- Interest rates: A lower DTI can help you qualify for better interest rates, potentially saving you thousands over the life of the loan.
- Loan amount: A high DTI could limit how much you’re approved to borrow, affecting your home price range.
