What is a debt-to-income (DTI) ratio and why does it matter?

Along with your credit score, your debt-to-income (DTI) ratio is an important number that lenders will look at when you apply for a mortgage. It is a measure of your ability to manage your monthly payments. Besides an insufficient down payment, it’s the most common reason we see homebuyers not qualify for the loan they want.

So how is DTI calculated?

To calculate your DTI, add up all of your monthly debt payments (including student loans, credit card debt and car payments) and divide the total by your gross monthly income (that is, before taxes).

When you apply for a mortgage, your lender will estimate your total monthly housing cost based on your target home price. They will then add the total housing cost figure to your other debt payments to calculate what your DTI would be after you purchase a home. Lenders generally consider loans with lower DTI to be less risky.

The federal government defines a category of safe loans called “qualified mortgages,” with a maximum DTI of 43%. However, the government-sponsored enterprise known as Fannie Mae currently sets its maximum DTI at 45%.

Change is coming!

As of July 29, Fannie Mae will increase its maximum DTI to 50%. Some have reacted to the change saying that a 50% is too risky. Others think this is simply a recognition that housing is more expensive than it used to be. When looking at the difference between 45% and 50% DTI, Fannie Mae’s analysts were comfortable with the increased risk. Expect to see lenders across the board respond to this new standard.

Common questions

Whose income do I include when calculating DTI?
A lender will include the income from anyone responsible for paying the mortgage, for example, a spouse or domestic partner.

Do I include expected rental income in my DTI?
Generally, no. You cannot include income you expect to earn from renting out a room in your primary residence.

What can I do to improve my DTI?
Oftentimes, you can refinance existing debt (such as student loans) to lower your DTI. It might also make sense to pay off any credit card debt before you apply for a mortgage. Finally, making a larger down payment can reduce your DTI significantly.