What Debt-to-Income Ratio Do You Need For a Mortgage?

When you’re ready to purchase a home, lenders are looking at several elements to understand what kind of borrower and spender you are. One number is worth a thousand words: your debt-to-income ratio. But what is it? And how do you calculate it? Here’s what you need to know.


What is debt-to-income ratio?

Debt-to-income ratio, or DTI, is an industry standard measure used to establish how much house you can afford. This percentage shows how much of your money goes toward debt, giving you and the lenders a clear picture of how much you can dedicate toward paying off a mortgage each month. If you’re getting ready to buy a home, the lower your DTI, the better.  


How to calculate your debt-to-income ratio

Calculating your DTI is rather simple. Just add up all of your monthly expenses and divide it by your monthly gross income (income before taxes, retirement contributions, etc.). What expenses should you include? Think things like your current rent or mortgage payment, car payments, student loans, child support, credit card minimums, and any other recurring payments you make each month.   


How much should your debt-to-income ratio be for a mortgage?

Whether you are taking out a mortgage for the first time, or refinancing a loan you already have, lenders look at your DTI to assess the level of risk they will incur by lending to you. Usually, the higher your DTI, the riskier you are because it indicates that you may be less financially able to make your mortgage payments. This can affect how much lenders are willing to let you borrow and at what interest rate.

Lenders usually prefer conventional loan borrowers (those not getting a loan backed by the government) to have a DTI of 36% or lower. This means that roughly a third of your gross monthly income goes toward fixed debt payments and the rest is your to spend willingly. Depending on your financial health and credit score, you may qualify for a loan with a DTI up to a maximum of 50%. Loans backed by the government, like FHA loans, usually accept borrowers with a DTI of up to 43% and may go up to 57% in some cases.


The two variations of debt-to-income ratio

When you’re applying for a mortgage, lenders will evaluate your DTI in two ways, the front-end and back-end, to get an even better understanding of your monthly income.

Front-End Ratio: The front-end looks at how much of your gross monthly income is going specifically towards your housing costs. This includes payments like your monthly mortgage, private mortgage insurance (PMI), property taxes, and homeowner’s insurance. Lenders like to see a front-end DTI between 28-35%.  

Back-End Ratio: When you’re adding up all of your monthly expenses to measure your DTI, you’re technically calculating your back-end ratio. Like the front-end, this includes home-related costs, but it also includes your credit card payments, car loans, and more. This number provides a broader look at all of your spending to lenders.  


Tips on Lowering Your DTI

If you aren’t happy with your current DTI and are looking to lower your ratio, it can be done by increasing your monthly income or decreasing your existing debt.

  • Try paying your credit cards with the highest interest rates first.
  • Use the 50/30/20 rule to create a budget and stick to it! We wrote a blog post on how beneficial this rule can be.
  • Pay all of your bills on time to avoid late fees, which can lead to a lower credit score.
  • Get a side hustle to increase your monthly income!

To learn more information about how Pioneer can be a financial partner in helping you achieve your goals, call or visit one of our branch locations.