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Debt-to-Income (DTI) Ratio, Explained

Quick take: DTI tells lenders how much of your monthly gross income goes to debt. Lower is better.

Formula:
DTI = total monthly debt payments ÷ monthly gross income

Front-End vs. Back-End DTI

Front-end DTI (housing ratio)
What % of your gross income would go to housing: monthly mortgage payment (principal & interest) + property taxes + homeowners insurance + HOA dues.

Back-end DTI (total debt ratio)
What % of your gross income covers all debts: your housing costs plus car loans, student loans, credit card minimums, personal loans, etc.

How to Calculate Your DTI (2 steps)

  1. Add up monthly debts.
    Include: car loans, credit card minimums, student loans, personal loans, and your estimated mortgage payment, homeowners insurance, property tax, and HOA (if any).
  2. Divide by monthly gross income.
    Use income before taxes and other deductions.

What’s a “Good” DTI?

  • A common benchmark is 28/36:
    • Front-end ≤ 28%
    • Back-end ≤ 36%
  • Many lenders can approve higher back-end DTIs—often up to 45%–50%—with strong credit or other compensating factors (e.g., a larger down payment).

Bottom line: Aim lower when you can. Stronger profiles often unlock better mortgage rates and terms.

How to Lower Your DTI

  • Know your numbers. Build a realistic budget so you can spot places to cut and redirect cash to debt.
  • Pick a payoff plan.
    • Snowball: Pay off the smallest balance first to build momentum.
    • Avalanche (ladder): Pay off the highest-rate balance first to minimize interest.
  • Make debt cheaper. Ask card issuers for a rate reduction, consider a balance transfer (watch fees and promo periods), or consolidate with a lower-rate personal loan.
  • Pause new debt. Especially before and during a home purchase—new loans can raise DTI and ding your credit, potentially jeopardizing approval.

Quick Tip: Re-run your numbers after each change. Small moves (like dropping a card’s APR or knocking out one balance) can shift your DTI—and your rate quote—meaningfully.

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Frequently asked questions

Why does my DTI ratio matter when applying for a mortgage?

Lenders use DTI as a quick way to measure risk. If too much of your income is tied up in debt, they worry you won’t be able to handle a mortgage payment. A lower DTI usually means you’re more likely to qualify—and at better rates.

Does rent count toward my DTI?

Typically, no. When you apply for a mortgage, lenders assume you won’t keep paying rent once you own a home. Instead, they focus on your future housing payment (mortgage, taxes, insurance, HOA) plus your other debts.

What’s the difference between front-end and back-end DTI?

- Front-end DTI = housing costs ÷ income (just the mortgage, taxes, insurance, HOA). - Back-end DTI = housing costs + all other monthly debts ÷ income. - Both matter, but the back-end ratio is usually the bigger hurdle.

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