What is a good debt-to-income ratio when applying for a mortgage

The debt-to-income ratio (DTI) is a crucial factor that lenders consider when evaluating your mortgage application. This number compares your monthly debt payments to your gross monthly income, providing information about your financial health and ability to manage mortgage payments. Simply put: Lenders use the DTI ratio to determine loan risk. Here’s what you should know about how the DTI ratio is calculated and what you can do to put yourself in the best lending position possible.

How to Calculate Your DTI Index (and Why You Should)

The debt-to-income ratio is calculated by dividing your total monthly debt payments by your gross monthly (also known as pre-tax) income. For example, if your monthly debts total $2,000 and your gross monthly income is $6,000, your DTI ratio would be 33% ($2,000 / $6,000 = 0.33).

The main purpose of calculating the DTI index is risk assessment. While your credit score tells lenders how you’ve managed loan payments in the past, your DTI tells lenders whether you have enough money currently available to pay off a loan going forward. A lower DTI suggests you have a better chance of managing your mortgage payments successfully. A lower DTI ratio can not only increase your chances of mortgage approval, but also help you qualify for better interest rates and loan terms.

Optimal DTI Ratios for Mortgages

According to the Consumer Finance Protection Bureau, 43% is typically the highest DTI ratio a borrower can have and still qualify for a mortgage. However, lenders tend to prefer a DTI ratio of less than 36%. Ideally, no more than 28% to 35% of your total income should go toward servicing a mortgage.

Tips to Improve Your DTI Ratio

If your DTI is higher than desired, it may not be the best time to apply for a mortgage. There’s no easy trick here: your best bet is to pay off your existing debts. Consider asking lenders to reduce your interest rate, which would lead to savings you could use to pay down debt. Likewise, increasing your income would also improve your DTI ratio. If you are focused on improving your number, do not apply for new credit or loans as this would have a negative impact on your DTI ratio.

Keep in mind that while DTI is important, it won’t be a deal breaker until you’re up about 43%. It’s just one factor that lenders consider, while elements like credit score, employment history, and down payment play more significant roles in the mortgage approval process.

For more information on navigating the home buying process, check out my “How We Bought Our First Home” series here. And if you want to share your experiences buying your first home, leave a comment below. Perhaps you can help paint a broader picture of what it’s like to navigate the real estate market today — especially without generational wealth.