What Is a Debt-To-Income Ratio (DTI) and Why Is It Important?

Mortgage lending criteria generally falls into three categories often termed the "3 Cs": credit, collateral, and capacity. Credit has to do with how well you manage debt (as evidenced by your credit report and scores), collateral refers to the type and value of the property you are using to secure the mortgage loan, and capacity has to do with your financial ability to repay the loan. One of the key measures of the latter category, capacity, is your debt-to-income ratio, or DTI.

What is A Debt-to-Income Ratio?

Your debt-to-income ratio is the proportion of your gross monthly income, expressed as a percentage, that you spend for housing-related expenses (mortgage payments, property taxes, homeowners insurance, HOA fees, mortgage insurance, etc.) and debt obligations such as credit cards, car loans, student loans, etc.

If your DTI is high, it indicates you have tight finances, which is a serious risk factor from a lending standpoint. If your DTI is low, you have more disposable income to weather unexpected expenses and keep up with your mortgage payments. Naturally, this means you're a less risky borrower to a mortgage underwriter.

In today's home loan marketplace, the two dominant types of mortgage financing are Fannie Mae conventional and FHA-insured. For conventional mortgages, the maximum allowed DTI for most borrowers is 45%. In other words, no more than 45% of your monthly income can go to debt and housing expenses to qualify under Fannie Mae guidelines. Under FHA guidelines, the maximum DTI allowed is 50%.

How to Calculate Your Debt-to-Income Ratio

Calculating your debt-to-income ratio is pretty simple and can be accomplished with the following steps:

1. Gather up all statements for your monthly debt obligations or pull a current copy of your credit report.


2. Tally up the payments for all debts except your mortgage or rent (we'll get to that in a minute). Make sure to include all credit cards, auto loans, student loans, personal loans, etc. Use just the minimum payment for credit cards and revolving credit lines. Note that only debt obligations are included in your DTI, not utilities, the cable bill, cell phone bills, groceries, etc. If you pay child support, make sure to include that as well.


3. Now add in your home mortgage payment, including monthly payments for property taxes, homeowners insurance, mortgage insurance, and HOA fees (where applicable). If you're currently a renter, use your monthly rent payment instead.


4. Now divide the total figure by your gross monthly income, then multiply by 100 to get a percentage.

Note that underwriters will qualify you based on your new debt-to-income ratio once the new home loan is complete. So if you're paying off bills as part of a refinancing, selling an existing home and buying a new one, or moving out of an apartment into a new home, be sure to calculate your debt-to-income ratio based on what it will be after the new loan is complete..

It's also important to note that other factors may impact your debt-to-income ratio. If you have a more complex financial situation that involves rental property, self-employment, non-conventional forms of income, etc., calculating a debt-to-income ratio may be more complex than what is presented here. In such cases it's important to work with a mortgage professional to determine your mortgage qualifications.

M. Robert
Mortgage & Mortgage Broker