Debt-to-Income ratio | What is a good DTI for a mortgage?

A mortgage debt-to-income (DTI) ratio is a measure that compares your debt to the income you receive.

Mortgage lenders use it 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:

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 to qualify you for a mortgage. This helps them determine your debt-to-income ratio and whether you can afford the monthly mortgage payments. 

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 a mortgage's debt-to-income (DTI). 

Check out our mortgage calculator to see the actual rate and monthly payment, including all components of the PITI. Then, you can feel confident 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:

• Debts that you'll pay off within ten months of the mortgage closing date
• Debts not reported on credit reports, such as utility bills and medical bills
• Debts paid by others

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. 

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.

The DTI ratio limits for conventional mortgages 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, it is always good to check with a lender like NewCastle Home Loans 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.

The mortgage you can afford depends on several factors: 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.