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When you apply for a mortgage, the lender looks at several financial factors to determine your ability to repay the loan. One of those factors is your debt-to-income (DTI) ratio, which shows your monthly debts versus monthly gross earnings in percentage form. Lenders will use your DTI to determine your ability to handle more debt.

Read on to learn about the ideal debt-to-income ratio for mortgage purposes, including how it varies by program, how you can calculate your DTI and what you can do to improve it.

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What is a debt-to-income ratio (DTI)?

Your DTI ratio is all your monthly debt payments divided by your total gross monthly income. Also called the back-end ratio, it shows how much of your income you use every month toward debts. It doesn’t consider any monthly expenses you may have to pay but aren’t actual debts.

Mortgage lenders also look at a variation called the front-end ratio or mortgage-to-income ratio. This ratio is your monthly mortgage payment divided by your monthly gross income. Note that the mortgage payment amount includes costs such as your homeowner's insurance, property taxes, mortgage insurance premiums and homeowners association fees.

The importance of DTI when applying for a mortgage

Lenders use your DTI for mortgage approval decisions and consider you more of a default risk if you have a high one. It indicates you have a smaller income cushion to cover all your debts, and financial hardship could worsen the situation. If you exceed the DTI limit for your mortgage program, you may have trouble getting home financing.

Knowing your DTI ratio matters for your financial planning as well. It can help you determine whether you should seek a home with a lower price or hold off on your home purchase until you can reduce other debts or increase your earnings. Having the best debt-to-income ratio for mortgage approval also offers you peace of mind since a lower debt load reduces your financial stress.

What debt-to-income ratio is needed for a mortgage?

Common back-end mortgage DTI limits typically range from 36% to 43%. But as explained below, your lender and specific mortgage program will have their own DTI requirements for mortgage approval decisions:

  • Conventional mortgages: Backed by Fannie Mae or Freddie Mac, these loans usually have a maximum DTI of 36% to 45% (although in some specific cases, it can be as high as 50%). It can depend on the property type, your borrowing situation and other factors. Specific programs, including Freddie Mac’s Home Possible, have a DTI limit of 43%.
  • U.S. Department of Veterans Affairs (VA) loans: The VA has set a maximum DTI ratio guideline of 41% unless you meet specific criteria, such as having tax-free income or residual income. In this situation, your DTI can be higher.
  • Federal Housing Administration (FHA) loans: The U.S. Department of Housing and Urban Development doesn’t list a specific DTI limit on its website. However, a specific lender might require a DTI ratio between 45% and 50%.
  • U.S. Department of Agriculture (USDA) loans: These government loans have a maximum DTI ratio of 41%.

Note that the best mortgage lenders and specific mortgage programs may allow for a higher DTI ratio if you have other positive financial indicators that compensate for it. These indicators could include a high credit score, stable and sizeable income, large down payment amount, significant cash reserves, or limited use of other debt.

Lenders will also look for a mortgage debt-to-income ratio not exceeding a range of 28% to 35%. You can ask about the recommended mortgage-to-income ratio for your chosen program. Additionally, keep in mind that a low ratio also means handling mortgage payments is more manageable.

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Other factors that influence mortgage approval

A lender won’t give you a home loan simply because you have a low DTI ratio. You’ll also need to meet credit score, down payment and employment requirements.

Credit score and history

Lenders want to see how well you manage your credit. A high credit score and a history of on-time repayment offer reassurance that you can repay your mortgage. If you have several missed payments or negative items, such as bankruptcies, you may have trouble qualifying for a mortgage. Additionally, a lower yet acceptable credit score can lead to higher mortgage rates and larger payments.

Credit score requirements depend on the lender and mortgage program. For example, the FHA sets its minimum at 500 while the USDA sets it at 640. The VA doesn’t state a minimum requirement but leaves it up to the lender. A common threshold for conventional mortgages is 620, but some lenders want 640 or higher.

Mortgage down payment amount

Your lender may request a down payment that often runs up to 20% of your home’s price. This money reduces the loan amount needed, so you can get lower monthly payments and save on interest. In order to cover the down payment you can save up on your own or look into down payment assistance programs.

USDA and VA loans normally don’t require money down. FHA loans require either 3.5% or 10% depending on your credit score. Additionally, conventional loans start with 3% down, but mortgage insurance premiums can apply unless you can afford 20% down.

Employment history and stability

Along with checking for a sufficient income, your lender will verify that you have a stable employment history with consistent earnings. For example, in most cases they may require that you’ve had your job for at least two years. They may have stricter rules for fluctuating earnings, such as those from seasonal work, tips or self-employment.

If you’re self-employed, you may run into challenges with mortgage approval. First, the lender usually averages the income reported on your last two tax returns, so you might end up with a lower mortgage approval amount. You’ll also need to show evidence you have an established business that will continue for a certain time period.

How to calculate debt-to-income ratio for mortgage

Whether you do the math or use a DTI mortgage calculator, you’ll need to know your monthly debts and gross income. You can then find your DTI ratio with a few straightforward calculations.

1. Total your monthly debt obligations

Using sources such as loans, credit cards and bank statements, list and total all your monthly debts. Some common obligations include the following:

  • First and second mortgages
  • Personal loans
  • Student loans
  • Auto loans
  • Lease payments
  • Credit cards
  • Child support payments

2. Calculate your gross monthly income

Next, look at documents such as pay stubs, Social Security statements and bank statements to find your total monthly income before any deductions and taxes. Include income sources beyond regular employment or self-employment earnings too. For example, you might receive money from government programs such as Social Security, rental properties, investments, child support or alimony.

If you earn irregular income, you might need to do some math to convert your earnings to a monthly amount. You could divide the estimated yearly pay by 12 for an average figure.

3. Exclude non-debt expenses

Non-debt expenses don’t factor into your DTI ratio. These include living expenses such as utilities, car and health insurance, food, clothing, entertainment, gasoline, child care and personal items. You should still consider them in determining your ability to make a mortgage payment though.

4. Divide your total monthly debt payments by your gross monthly income

After you’ve totaled your monthly debt payments and gross monthly income, divide those numbers. For example, if you have $1,200 in monthly debts and a $4,000 gross monthly income, this works out to 0.3. To save time, consider plugging the numbers into a mortgage DTI calculator.

5. Multiply by 100 to convert it to a percentage

The last step to calculate your DTI ratio for a mortgage involves multiplying the decimal result by 100. Following the previous example, 0.3 times 100 becomes a DTI ratio of 30%.

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Tips for improving your DTI ratio before applying for a mortgage loan

If you currently exceed the ideal debt-to-income ratio for a mortgage approval, try to lower it before you start shopping for one. Strategies include paying down debts, avoiding using further credit, boosting your income and making a budget.

Pay down your debts

Paying down existing debts will both help with lowering your DTI for mortgage approval and having a roomier budget for your future monthly mortgage payments. Reducing your loan and credit card balances may also improve your credit score so you can get better mortgage rates.

You can take several approaches to paying off debt, including sending creditors larger monthly payments or making extra payments when possible. You might also consider more structured options such as the debt avalanche and debt snowball methods. These focus on targeting a specific account to pay off first.

When you use the debt avalanche strategy, you find the account with the highest interest rate, pay it off and then move to the account with the next highest rate. The debt snowball strategy has you pay off your smallest debt first before moving to the next highest one. While using either method, you still pay the minimum on other accounts.

Keep in mind that you’ll need to pay off loans with fixed monthly payments in full to see a DTI ratio improvement. These may include student, personal, auto and existing home loans.

Avoid taking on new debt

More debt payments would further raise your DTI ratio. So you should avoid opening new accounts or running up balances on current ones. By doing so, you also help your credit score since credit inquiries, new accounts and higher credit utilization can all make it drop.

Boost your income

Increasing your income will help lower your debt-to-income ratio for mortgage approval and provide extra cash toward your down payment and closing costs. Just ensure that your lender can verify the income with documentation and that it meets the stability requirements.

You might start with your current stable job and see if you can work more hours or qualify for a raise. If not, consider other options like gig work or a second regular part-time job. However, beware that these income sources might not count for mortgage purposes until you’ve worked at them for at least 12 months.

Create a budget plan

To ensure you put enough toward paying off debts and preparing for your home purchase, make a budget plan that accounts for your income, expenses and financial goals. You can use a spreadsheet template, an online budgeting tool, or pen and paper.

Start with your household’s total post-tax income. Then, list your monthly expenses, such as housing payments, utilities, child care, groceries, transportation, insurance premiums, debt payments and entertainment. Your budget should also include items for savings goals, such as retirement and your home down payment.

After you subtract costs from your income, make sure you don’t end up with a negative number. If you do, aim to reduce expenses rather than contributions toward your goals. Each month, track your costs to ensure you don’t exceed your budgeted numbers. Additionally, update your expenses, income or goals whenever they change.

Summary of Money's What is a good debt-to-income ratio for a mortgage?

Whether you’re researching how to buy your first home or planning to upgrade your current property, having a good DTI ratio helps you stand out as a lower risk to lenders. By calculating this figure and considering other mortgage requirements, you can better understand your financial situation and decide if it’s the right time to buy a home. Raising your income or lowering debts might delay your plans temporarily, but these actions could pay off with higher mortgage approval chances and an easier time affording your payments.

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