Your DTI (Debt-to-Income) Ratio is, after your credit score, the single most important number when it comes to getting a loan. Even with a great 800+ credit score, a “bad” DTI can make you unlendable. If you have started or are thinking about starting toward purchasing a home, your lender will be keenly interested in your DTI.
Your lender will calculate your DTI during the preapproval process depending on what information you provide on income and debts. Then they will confirm your information during the loan approval process after a contract.
To calculate your DTI ratio, add everything spent monthly on debts and divide it by your monthly income.
Monthly Debt / Monthly Income = DTI Ratio
You make $4200/mo, have a student loan payment of $530, car payment of $330, some credit cards with a minimum monthly payment of $30. You are looking at a mortgage of $1100.
$530 + $330 + $30 + $1100 = $1990
$1990 / $4200 = 47% DTI Ratio.
Generally, 43% and lower is a very loanable DTI. It is possible to get loans even as high as the 50%s, but at that point your lender will probably have to have some sort of justification for the high DTI and go begging to their underwriter to still approve the loan.
For credit card debt, just the minimum monthly payment (even if it’s just $15 or so) is counted.
Included in the debt is the estimated mortgage payment for you house you are buying. The mortgage includes taxes, insurance, HOA fees and mortgage insurance premiums.
Front end versus Back end
Front end: includes mortgage only. A “good” ratio is 31% or less.
Back end: includes mortgage and all other installment debts (auto loans, student debt, credit card debt, etc.). This is what we calculated above. The percentage for an FHA loan is 43%.
Sometimes the front end/back end requirements are shown as 31/43, for example.
FHA requirements are generally 31/43.
VA loans generally require 41% back end ratio.
Conventional loans vary.
My DTI is too high! What can I do?
First, talk to your lender. They can look through your finances and make current recommendations. Sometimes it’s even just luck – depending on the underwriter your file gets. There are mitigating factors you can try to present to your lender, like a big savings account. It is possible to get a loan into the 50%s, though you will have to talk to your lender about what could be done to achieve that.
Paying off debt is the #1 best way to improve a DTI ratio. You might also see if any of your loans are getting paid off soon. If a debt is getting paid off in the next few months, it might not count against your DTI ratio.
Increasing your income is the other way to improve a DTI ratio. That is usually harder to do on the spot. A part time job might work. Or you could get a lease on your current home (or even rent a room!). 75% of the lease rents are counted toward your income.
You may discover you have DTI ratio issues as you acquire more than one home. I found at house 3 it started to become a problem (I managed to get 5 homes though, owner occupied financed!). Even if your finances are stable, only 75% of lease income is counted, which means even if your rent for past homes is keeping pace with your mortgage, your ratio is going to rise as you have more and more rentals.