Debt-to-Income Ratio | How to calculate DTI

The debt-to-income ratio (DTI) compares your debt to your income. Lenders use it to decide how much you can borrow for a home.

A high DTI might signal that your debt load is too heavy to comfortably take on a new mortgage, while a lower DTI shows financial stability.

In this article, I’ll explain the DTI ratio, how lenders calculate it, and the DTI limits you need to qualify for a mortgage. Let’s get started!

 

How to calculate DTI

To calculate your debt-to-income (DTI) ratio, lenders add all your monthly debt payments, including your estimated future mortgage payment. Then, they divide the total by your gross monthly income.

 

Your gross monthly income is $10,000, and your total monthly debt payments, including the future mortgage payment (PITI), are $4,300.

 

The formula looks like this: DTI ratio = $4,300 ÷ $10,000 = 43%

 

In this example, your DTI ratio is 43%. Most lenders prefer a DTI ratio of 43% or lower. Still, depending on the situation, some may approve higher ratios, up to 55%. We will discuss DTI limits later.

 

What is gross monthly income?

Gross monthly income is your total income before taxes and other deductions. It includes all sources of income, such as salary, wages, tips, bonuses, and self-employment income.

Lenders use your gross monthly income to determine your mortgage eligibility. It’s a key factor in calculating your debt-to-income ratio (DTI), which helps them assess whether you can afford your monthly mortgage payments.

To calculate gross monthly income, add the total yearly income from all borrowers on the mortgage application and divide it by 12 (the number of months in a year). 

 

If you and your partner apply for a mortgage with a combined annual income of $120,000, your gross monthly income is $10,000.

 

Buying the perfect home starts with a verified pre-approval. We verify everything upfront so you feel confident about making an offer, and sellers know you're ready to buy and close quickly! 

 

 

What debts do lenders include in the debt-to-income ratio?

When calculating your debt-to-income ratio, lenders consider the following types of debts:

Credit cards:

Your credit report shows the minimum monthly payment. The lender may use 5% of the outstanding balance or the amount from your credit card statement if no minimum payment is listed.

Installment loans:

Payments on car, student, and other installment debts with more than ten payments remaining

Other mortgages and real estate:

Payments for any additional properties you own and plan to keep

Support payments:

Any alimony, child support, or separate maintenance payments required under a written agreement

Your future mortgage payment:

Lenders estimate your new housing payment, including principal & interest, taxes, insurance, and homeowner’s association dues (if applicable).

• Can I count rent from my departing residence as income?

Understanding how your debts and income influence your DTI ratio is crucial when planning for a mortgage.

Use our mortgage calculator to see your potential rate and monthly payment, including all components of PITI (principal, interest, taxes, and insurance). This way, you can confidently move forward knowing what to expect when buying a home.

 

What debts do lenders exclude from the debt-to-income ratio?

Lenders typically exclude certain debts when calculating your debt-to-income (DTI) ratio. These exclusions may include:

Debts paid off soon:

Lenders may omit installment debts, like car or student loans, with a remaining balance you will pay off in ten or fewer months of the mortgage closing date.

For example, suppose your car loan balance is $3,000, and the monthly payment is $310. In that case, the lender will omit the payment from your DTI because you have less than ten payments remaining. 

Non-credit report debts:

Lenders may omit debts that do not appear on your credit report, like utilities and cell phones.

Debts paid by others:

If someone else has consistently made payments on a debt for at least the last 12 months, lenders may exclude it from your DTI.

To exclude debts paid by others, you’ll need to provide documentation, such as:

• 12 months of bank statements showing the payments made by someone else.
• Canceled checks as proof of payment.

Special note on excluding mortgage debts

If the debt is a mortgage, the process is slightly different. The person making the payments must also be listed on the mortgage loan agreement to exclude the monthly payment (PITI).

• How a mortgage co-signer can help you buy a home
• Can you get a mortgage if you're already a co-signer?

Lenders may have slightly different methods for calculating DTI and determining which debts to exclude. It’s always a good idea to consult with your lender to clarify how they handle exclusions and ensure you understand your borrowing power.

Knowing what debts lenders include and exclude, you’ll be better prepared to plan your finances and qualify for the mortgage that meets your needs.

Are DTI limits different for Conventional and FHA loans?

Debt-to-income (DTI) ratio limits differ depending on the type of mortgage you’re applying for and the lender’s requirements. Here’s a breakdown:

Conventional Mortgages

• Lenders typically prefer a DTI ratio of 43% or less for conventional loans.
• Sometimes, lenders may allow a DTI ratio of up to 50%, depending on the borrower’s overall financial profile.
• How much is conventional mortgage insurance (PMI)?

FHA and VA Loans

• FHA and VA loans tend to have higher DTI limits than conventional loans.
• For example, lenders may approve borrowers with a DTI ratio of up to 55% for these loans. However, this can vary based on the lender’s and the borrower’s circumstances.
• How much is FHA mortgage insurance?

DTI ratio limits can vary depending on the lender and your situation. It’s always a good idea to check with your lender, such as NewCastle Home Loans, to understand their specific DTI requirements and how they apply to your mortgage options. Knowing these limits can help you choose the right mortgage and feel confident about your homebuying journey.

How much of a mortgage can I afford based on my income?

Estimating how much mortgage you can afford is simpler than you might think. Here’s a step-by-step method for determining your price range when shopping for a home or condo.

1. Start with 50% of your gross monthly income:

Your monthly debts, including your future housing payment, should not exceed 50% of your gross monthly income.

For example, if your gross monthly income is $10,000, your maximum allowable monthly debt is $5,000.

2. Add up your current monthly debts:

Include payments like student loans, car loans, and credit cards.

For example:

• $250 for student loans
• $450 for a car loan
• $175 for credit cards
• Total = $875

3. Subtract your debts from your maximum debt limit:

Take your maximum monthly debt ($5,000) and subtract your current debts ($875). This leaves $4,125 for your future housing payment, which includes principal, interest, taxes, insurance, and HOA dues (PITI).

4. Determine your price range:

Use your maximum housing payment to find properties within your budget. Research property taxes and HOA dues on sites like Redfin or Zillow, then use our mortgage calculator to estimate rates, payments, and private mortgage insurance (PMI).

Factors that impact how much mortgage you can afford:

Your income, credit score, monthly debt obligations, and estimated housing payment all play a role in determining your mortgage affordability.

This calculation gives you a great starting point for identifying your price range. However, getting a verified mortgage pre-approval is essential before looking at homes.

One of our certified mortgage underwriters will review your financial information so you’ll know exactly how much you can afford—and you’ll be ready to make a confident offer.

Resources

Consumer Financial Protection Bureau: What is a debt-to-income ratio?

Fannie Mae—Conventional loan: Debt-to-income ratios

Freddie Mac—Conventional loan: Monthly debt payment-to-income (DTI) ratio

Federal Housing Administration—FHA loan: Qualifying Ratios

Veterans Benefits Administration—VA loan: Debts and Obligations