How to Calculate Debt-to-Income Ratios and Why It Matters?

When you’re ready to buy a home, your credit score is a big piece of the puzzle. But there’s another number that’s just as important for getting your loan approved: your Debt-to-Income (DTI) ratio. Think of it as a financial snapshot that tells lenders how well you can handle a new mortgage payment.

Understanding your DTI can be the difference between getting approved for your dream home or facing a setback.

Why Your DTI Ratio Is a Big Deal

So, why do lenders focus so much on this number? Your DTI ratio is one of the most important factors they use to assess your financial health. It helps them figure out:

• Whether to approve your loan. A high DTI can be a red flag, signaling that adding a mortgage payment might stretch your budget too thin.
• How much you can borrow. The lower your DTI, the more confident lenders are in your ability to pay back a loan. This often means you can qualify for a larger mortgage.
• What your mortgage insurance might cost. For some loans, a lower DTI can lead to lower Private Mortgage Insurance (PMI) payments, saving you money each month.

In short, a healthy DTI ratio makes you a stronger applicant and can unlock better loan options.

How to Determine DTI Ratio: Step-by-Step

Calculating your DTI is simpler than it sounds. It’s a percentage that shows how much of your monthly income goes toward paying off debts.

The formula is:

DTI Ratio=(Total Monthly Debt÷Gross Monthly Income)×100

Let's break it down in three simple steps.

Step 1: Add Up Your Monthly Debt Payments

List all your regular, required monthly debt payments. This includes:

• Minimum payments on credit cards
• Car loans
• Student loans
• Personal loans
• Any other loans you pay each month

Important: Do not include everyday living expenses like your phone bill, groceries, utilities, or subscriptions.

Step 2: Find Your Gross Monthly Income

Your gross monthly income is your total earnings before taxes and other deductions are taken out of your paycheck.

• If you have an annual salary: Divide your total yearly salary by 12.
  
  • Example: If your salary is $84,000 per year, your gross monthly income is $84,000 \div 12 = $7,000.
• If you earn an hourly wage: Multiply your hourly rate by the number of hours you work a week, then multiply that by 4.33 (the average number of weeks in a month).
  
  • Example: If you earn $25 per hour and work 40 hours a week: ($25 \times 40) \times 4.33 = $4,330 gross monthly income.

Step 3: Put It All Together

Now, let's calculate the DTI using an example. Let's say you want to buy a house with a future mortgage payment of $2,800 per month (this includes principal, interest, taxes, and insurance).

1. Calculate Your Non-Housing Debt:
   
   • Credit Card 1 (minimum payment): $85
   • Credit Card 2 (minimum payment): $55
   • Car Loan: $565
   • Student Loan: $225
   • Total Non-Housing Debt = $930

2. Calculate Your Total Future Debt:
   
   • Total Non-Housing Debt: $930
   • Future Housing Debt: $2,800
   • Total Monthly Debt = $3,730

3. Calculate the DTI:
   
   • Your gross monthly income is $7,000.
   • DTI = ($3,730 ÷ $7,000) × 100 = 53.3%

This means 53.3% of your monthly income would go toward debt if you took on this mortgage.

What to Do: Improving Your DTI Ratio

If your DTI is higher than you’d like, don’t worry. You have the power to change it. Here are the best ways to lower your DTI and become a stronger mortgage applicant:

• Pay Down Your Debts. The fastest way to improve your DTI is to reduce your total debt. Focus on paying off loans with the highest monthly payments or tackling smaller credit card balances to eliminate them completely.
• Look for a Less Expensive Home. Lowering your purchase price means a smaller mortgage payment, which directly reduces your DTI.
• Increase Your Down Payment. A larger down payment reduces the total amount you need to borrow, resulting in a smaller monthly mortgage payment.
• Boost Your Income. If possible, consider ways to increase your earnings, such as taking on a side job or negotiating a raise. More income automatically lowers your DTI percentage.

Understanding DTI Benchmarks

Lenders have different DTI limits depending on the type of loan.

• Front-End DTI: This looks only at your proposed housing expenses (mortgage, taxes, insurance) compared to your income. Some loan programs have a specific limit for this.
• Back-End DTI: This is the number we calculated above, which includes your housing costs plus all your other debts. This is the most important DTI figure for lenders.

Here are the general limits for back-end DTI:

• Conventional Loans: Typically require a DTI of 50% or less.
• FHA Loans: Are often more flexible and may allow a DTI up to 57%. However, if your credit score is below 620, the limit might be lower, around 43%.

Knowing these numbers helps you set a realistic budget and understand which loan options might be right for you. By taking control of your DTI, you’re not just preparing for a mortgage—you're building a stronger financial future. 

Making the Mortgage Process Easier for You

At Altgage, we’re not just a mortgage company - we’re your financial guide. Whether you're a first-time buyer or refinancing, we help you understand your numbers so you can make smarter moves.

Our easy-to-use affordability calculator lets you plug in your details and see where you stand. Plus, our team is always here to guide you with personalized tips on how to qualify for the best loan.

We believe home buying should be transparent, stress-free, and empowering - and understanding your DTI is a big part of that.

Check us out at www.altgage.com and get started today!

FAQs

1. What’s the Average DTI Ratio?

In the U.S., the average DTI ratio for homebuyers tends to hover around 35% to 45%. But remember, lower isn't always better. If you're at 30% or less, you're well within your budget, but going up to 50% or higher may be reasonable depending on your life circumstances. Mortgage payments remain the same for most loans, while incomes typically increase each year.

2. Can I get a mortgage with a high DTI ratio if I have a high credit score?

Yes, Lenders will approve your application as long as your DTI is under respective loan limits. Excellent credit helps reduce rates, and a large down payment reduces the loan amount. Last but not least, paying off debt at closing is the most effective way to lower your DTI

3. Does rent count as debt in my DTI ratio calculation?

If you’re applying for a mortgage, future rent won’t be included in your DTI because it will be replaced by your mortgage payment. However, if you have a rental property, the rent from your tenant will count towards your income and may offset the entire existing mortgage payment.

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