Understanding Debt-to-Income Ratio Mortgage Requirements

What’s the Difference Between Front-End DTI and Back-End DTI?

Mortgage lenders often look at your front-end and back-end debt-to-income ratios to understand how your income compares to your housing costs as well as your total debts.

• Front-end DTI: Your front-end DTI is the ratio of housing payments to income. It compares the cost of principal, interest, taxes, and insurance to gross income. While 28% is commonly cited, some government-backed loans (FHA and VA loans) may allow for higher front-end ratios.
• Back-end DTI: Your back-end DTI looks at total debt relative to income. It includes your new housing payment and all other debts like a car loan, credit card bills, and personal loan debt. You should target a back-end ratio at 36% or less but there is some flexibility here which we’ll get to.

Mortgage lenders may require you to meet both of these criteria, but they may also make exceptions if you meet or exceed other requirements for the type of home loan you’re applying for. 

How to Calculate Debt-to-Income Ratio

You can calculate your debt-to-income ratio using a simple formula. You take your monthly debt payments and divide that number by your gross monthly income. Multiply the result by 100 to get your DTI as a percentage.  

If you were calculating your front-end DTI, you'd only include your housing payment in this calculation. If you are calculating your back-end DTI, you include all of your debts. 

For example, if your total debt payments add up to $2,000 per month and your gross monthly income is $5,000, here is how you'd calculate your back-end DTI:

Here are more examples to show how different amounts of debt can change DTI with the same income:

Curious about your DTI? Enter your info into our DTI calculator for a better understanding: 

Debt-to-Income Ratio (DTI) Calculator

Use our calculator to estimate your debt-to-income ratio. Enter your total monthly debt payments and your monthly income to calculate your DTI!

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Monthly Debt Payments

Monthly Gross Income

This DTI calculator is made available as a self-help tool for your personal use. We do not guarantee its accuracy or applicability to your individual circumstances. Resulting calculations are for illustrative and informational purposes only and are not intended as investment or financial advice. Consult a qualified financial advisor before making important personal finance decisions. To get a better understanding your debt-to-income ratio, speak with a loan advisor at Freedom Mortgage.

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What Does Debt-to-Income Ratio Include?

Not all monthly payments are included in DTI calculations. And you will include different payments depending on whether you are calculating your front-end or back-end DTI. 

While rent or student loan payments will have an impact on your back-end DTI, cell phone bills and utilities won’t. Here’s what to know:

Your monthly gross income should include wages earned, plus tips and bonuses if applicable. It should also include Social Security income and pension payments, child support, and alimony, if you wish this income to be considered.

What Debt-to-Income Ratio Do You Need to Buy a House?

Depending on the loan type you select, lenders generally prefer a maximum back-end debt-to-income ratio of 36% which provides them the greatest flexibility in the mortgage approval process. Given the right circumstances, some lenders may be able to accept a DTI ratio of 45% or higher when you’re buying a home with a conventional loan. You may need to offset your higher DTI with other factors to secure mortgage approval.

Keep in mind that lenders will include the estimated cost of your new monthly mortgage payment when they calculate your back-end debt-to-income ratio. If your new mortgage has a higher monthly payment than your current housing costs, your DTI is likely to go up. 

Lenders also look at your front-end DTI, which is your housing costs relative to your income. Ideally, your front-end DTI will be 28% or lower.

Getting Approved for a Home Loan with a High DTI

Some lenders will allow a higher DTI if a borrower has compensating factors that show they can afford their new home loan, such as:

• Excellent credit scores
• Exceeding the loan’s required down payment
• Having savings for three to six months of mortgage payments
• A current housing payment that’s close to the new mortgage payment
• Proof of stable, long-term employment

The factors that can offset a high DTI can vary between lenders and loan types. If you have a high DTI ratio, your lender can help you understand what factors might improve your chances of approval. You can also get prequalified for an estimate of what you may be eligible for based on your current financial situation. 

Debt-to-Income Ratio and Mortgage Affordability

Calculating your DTI is important to determining how much home you can afford. You can see both how much of your income will be taken up by housing costs and how much, in total, will go toward paying all of your debt.

This gives insight into whether you can comfortably live on what's left or if you will find yourself "house poor," devoting so much money to your house that you have little left for other goals.

What Is a Good Debt-to-Income Ratio?

Financial professionals often recommend keeping your front-end ratio under 28% and your back-end debt-to-income ratio under 36% when you are applying for a mortgage.      

Lower DTI ratios are typically preferred because they indicate your capacity to repay your debts and manage other routine bills, along with unexpected expenses like car repairs, home repairs, and medical bills. A lower DTI means you have more of your income available to pay your expected monthly mortgage expenses and other obligations than you would with a higher DTI.     

A lower DTI is one of the factors that allow lenders to offer their most competitive interest rates and terms. This means a good debt-to-income ratio may improve your chances of both getting approved for a mortgage to buy or refinance a home and being offered the best available rate when you apply.

Debt-to-Income Ratio by Loan Type

While lenders have their own DTI guardrails, requirements can also vary based on home loan type:

• Conventional loans: Many conventional loan lenders use the 28/36 rule to determine eligibility, so your housing costs should be 28% and your total debt should be below 36% of your income. Some may allow a DTI as high as 45% under certain loan programs and conditions.
• FHA loans: FHA loans are backed by the Federal Housing Administration. While lender policies vary, the maximum DTI is often around 43%.
• USDA loans: USDA loans are guaranteed by the U.S. Department of Agriculture. Some lenders allow you to qualify for USDA loans with a DTI as high as 44%, especially with compensating factors.
• VA loans: VA Loans are backed by the U.S. Department of Veterans Affairs. The maximum DTI for these loans is typically 41%.

Tips for Lowering Your DTI Before Buying a Home

Lowering your DTI ratio could help improve your chances of being approved for a mortgage and getting a competitive rate. Fortunately, there are a few simple steps you can take:   

• Pay off high-interest debt: Paying off high-interest debt can reduce your monthly obligations and lower your overall debt. 
• Consolidate debt: Debt consolidation allows you to combine multiple loans into one big new loan, potentially with a lower monthly payment that can reduce your DTI.
• Refinance loans: You can refinance your mortgage or other outstanding debt. If you lower your interest rate, extend your payoff time, or both, you can reduce your monthly payments and improve your DTI. By refinancing, the total finance charges may be higher over the life of the loan.

A lower DTI means that a smaller percentage of your income goes to your mortgage and other debts you owe. However, keep in mind that some strategies, like paying off and closing a credit card or taking out a debt consolidation loan, can affect other approval factors, such as your credit history length, credit utilization, credit mix, and credit score. 

Final Thoughts: Debt-to-Income Ratio for Mortgages

If you’re thinking about buying a home soon, calculate your DTI ratio today and see how it compares to common mortgage requirements. This can help you narrow your home search and determine when it’s the right time to buy.     

With a lower DTI, you could be on your way to getting approved for a home loan, and at a competitive rate. A mortgage loan officer can help you understand the lender's DTI requirements as well as offer insight into whether taking out a loan at your current debt levels makes sense for you. Explore different mortgage types today and take the next step to applying for a mortgage when you’re confident in your financial health.