Debt-to-income (DTI) is a measure that compares your debt to the income you receive. Mortgage lenders use this ratio to determine how much you can afford to pay for a home loan. A higher DTI may indicate that you have too much debt and can't afford the payments on a new mortgage.
In this article, I’ll explain the mortgage debt-to-income ratio, how lenders calculate it, and the DTI you need to get a home loan.
How to calculate DTI
To calculate your DTI, the lender adds up all your monthly debt payments, including the estimated future mortgage payment. Then, they divide the total by your monthly gross income to determine your DTI ratio.
Here is an example of how a lender might calculate your debt-to-income (DTI) ratio for a mortgage:
Your gross monthly income is $10,000, and your total monthly debt payments are $4,300, including the future mortgage payment (PITI). To calculate your DTI, the lender divides your monthly debt payments by your gross monthly income like this:
DTI ratio = $4,300 / $10,000 = 43%
In this case, your DTI ratio would be 43%. Lenders generally prefer to see a DTI ratio of 43% or less. However, some may consider higher ratios, up to 55% on a case-by-case basis - more about DTI limits later.
What is gross monthly income?
Gross monthly income is a person's 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 when qualifying you for a mortgage. It helps them determine your debt-to-income ratio and whether you can afford the monthly mortgage payments.
To calculate gross monthly income, add the yearly income from all the borrowers applying for the mortgage and divide the total by the number of months in the year (12). For example, if you and your partner apply for a mortgage, and your combined annual income is $120,000, your gross monthly income is $10,000.
What debts do lenders use to calculate debt-to-income (DTI)?
Lenders consider the following types of debts when calculating your debt-to-income (DTI) for a mortgage.
Credit cards - the minimum payment from the credit report. Suppose the credit report does not show a minimum amount. In that case, the lender uses 5% of the outstanding balance for the monthly debt. Or, they'll use the monthly payment on your credit card statement.
Installment loans, such as car and student loans, with more than ten payments remaining
Other mortgages and real estate owned that you'll retain
Support payments - any alimony, child support, or separate maintenance payments you must make under a written agreement
Lenders will use your future mortgage payment - the estimated housing payment of principal & interest, taxes, insurance, and homeowner's association dues (PITI), if applicable when calculating the debt-to-income (DTI) for a mortgage.
To see the actual rate and monthly payment, including all components of the PITI, check out our Mortgage Calculator. Then, feel confident in buying a home because you know what to expect.
What debts do lenders exclude when calculating the debt-to-income ratio for a mortgage?
Lenders generally exclude certain debts when calculating a mortgage's debt-to-income (DTI). These debts may include:
To exclude debt others pay, you must prove to the lender that someone else made the payments on time for at least the last 12 months. Lenders accept 12 months' bank statements or canceled checks.
If the debt is a mortgage, to exclude it and the total monthly housing payment (PITI) from your DTI, the person making the payments must be on the mortgage - they signed the loan agreement.
Let's say your parents co-signed the mortgage you used to buy a house last year. And since then, you have made the payments on time, at least for the previous 12 months. When your parents apply for a mortgage to buy a refinance their home, they may exclude your debt - the debt from the mortgage they co-signed for you, by providing their lender with copies of your bank statements proving you made timely mortgage payments for the last 12 months.
Lenders may use different methods for calculating DTI, so it's always a good idea to check with your lender to determine which debts they will exclude from the calculation.
Are DTI limits different for conventional and FHA loans?
The debt-to-income (DTI) limits for mortgage loans can vary depending on the type of mortgage and the lender's requirements.
For a conventional mortgage, the DTI ratio limits are typically lower than those for other types of mortgages, such as FHA or VA loans. Lenders generally prefer to see a DTI ratio of 43% or less.
However, some may consider a higher DTI of up to 50% on a case-by-case basis.
For FHA and VA loans, the DTI ratio limits are generally higher than those for conventional mortgages. For example, lenders may allow a DTI ratio of up to 55% for an FHA and VA mortgage. However, this can vary depending on the lender and other factors.
DTI ratio limits for mortgage loans vary depending on the lender and your circumstances. Therefore, checking with a lender like NewCastle Home Loans is always good for the specific DTI ratio requirements.
How much of a mortgage can I afford based on my income?
Here's a simple way to estimate how much mortgage you can afford. In this example, let's assume you want to buy a condo and are looking for a price range.
Start with half of your gross monthly income. Your total monthly debts, including the future housing payment, can be at most 50% of your gross monthly income. So if your gross monthly income is $10,000, then $5,000 is your maximum monthly debt.
Next, add up your monthly debts. For example, your student loans are $250, your car costs $450, and your credit card payments are $175, for $875.
Then, subtract your debt from your income to get the maximum housing payment for the condo, including the principal, interest, taxes, insurance, and HOA dues (PITI). $5,000 - $875 = $4,125. Based on these numbers, you must keep your future housing payment under $4,125.
After that, you can determine which condos you can afford by calculating the monthly housing payment (PITI). Find the property taxes and homeowner's association dues on Redfin or Zillow. Use our mortgage calculator to view current rates, payments, and PMI.
In the following scenario, you can afford the $3,103 monthly payment because it's less than your maximum of $4,125.
$400,000 purchase price
$12,000 down payment of 3% of the purchase price
$388,000 loan amount
Monthly housing payment
$2,203 loan payment, principal & interest
+ $150 mortgage insurance
+ $500 property taxes
+ $250 HOA dues
= $3,103 estimated total monthly housing payment
The mortgage you can afford depends on several factors, including income, credit score, monthly debt obligations, and future monthly housing payments.
Again, this calculation helps you find a price range. But before looking at homes, get a verified mortgage pre-approval. One of our certified mortgage underwriters, the loan decision-maker, verifies your financial information, so you know you're ready to buy.