debt to income ratio for mortgage: What you should know

Buying your first home can feel like a wild mix of excitement and nerves. Suddenly, you’re faced with terms like Debt-to-Income ratio (DTI), and if you’re like most first-time home buyers, you might be thinking, “What does that even mean, and why does it matter?” Don’t worry — you’re not alone!

Whether you're fresh out of college or starting over after life threw you a curveball, understanding your DTI could be the key to unlocking the front door of your dream home. Today, we’ll walk you through what a DTI is, why it matters, how to calculate it, and how to lower it if it’s too high. By the end, you’ll know exactly how much house you can afford and how to position yourself as a strong mortgage candidate.

What is Debt-to-Income (DTI) Ratio? Why Does It Matter?

The Debt-to-Income (DTI) ratio is a way for lenders to see how much of your money is already tied up in bills. It measures how much of your monthly income goes toward paying off debt. Lenders use it to decide if you can handle a mortgage on top of your current bills. The lower your DTI, the better you look to a lender.

Here’s how it works:

Take all of your monthly debt payments (like credit cards, student loans, and personal loans) and divide it by your gross monthly income (your total income before taxes).

Example:

Monthly Debt Payments = $1,050

Gross Monthly Income = $7,500

To calculate DTI, divide your debts by your income:

1,050 ÷ 7,500 = 0.14 (or 14%)

A 14% DTI is solid, but what’s considered "good"? Most lenders like to see a DTI of 43% or lower to approve you for a mortgage. Some government-backed loans, like FHA loans, allow DTI ratios as high as 50-57% if you have other strong financial factors (like a high credit score or extra savings).

Key Takeaway:

A DTI ratio under 43% is your best bet for getting approved for a mortgage. The lower your DTI, the more attractive you are to lenders — and that could mean better interest rates and loan options.

How to Calculate Your Debt-to-Income Ratio

If you’re thinking, “I’m not good at math,” don’t worry. This part is actually simple.

Step 1: Add Up Your Monthly Debt Payments

These include:

• Student loans (minimum payments)

• Credit card payments (the minimum monthly amount)

• Personal loans or lines of credit

• Child support or alimony payments

Note: Things like Netflix, Spotify, groceries, and utilities DO NOT count as debt payments.

Example:

• Student loan = $600

• Credit card minimum = $250

• Personal loan = $200

Total Monthly Debt = $600 + $250 + $200 = $1,050

Step 2: Calculate Your Gross Monthly Income

This is your income before taxes or deductions. If you and your spouse earn a combined $90,000 a year, divide by 12 to get your monthly amount:

$90,000 ÷ 12 = $7,500

Step 3: Divide Debt Payments by Gross Income

Take your total monthly debt and divide it by your gross income:

1,050 ÷ 7,500 = 0.14 (or 14%)

That means your DTI is 14%, which is excellent.

What’s a "Good" DTI for a Mortgage?

Lenders use two types of DTI:

• Front-End DTI: This only includes your future mortgage payment.

• Back-End DTI: This includes ALL of your debt payments plus the mortgage.

Here’s a quick guide for what’s considered a "good" DTI:

• FHA Loans: Can allow DTI up to 50-57%

• Conventional Loans: Usually prefer DTI of 43% or less

• VA Loans: Prefer DTI of 41% or less, but may go higher with strong financials

• USDA Loans: Typically allow DTI up to 41%

Key Takeaway:

For most loans, aim for a DTI of 43% or lower. FHA loans may let you go higher, but you’ll have more borrowing options if your DTI stays below 43%.

Example Couple: How Much House Can They Afford?

Let’s say Carlos and Emily, a 28-year-old married couple with a combined income of $90,000 per year, find a beautiful 3-bedroom, 2-bath house in Rochester, MN for $230,000. They drive used cars that are fully paid for, but they still have a few debts:

• Student loan = $600
• Credit card minimum payment = $250
• Personal loan = $200

Total Debt = $600 + $250 + $200 = $1,050

Their DTI with no mortgage is:

1,050 ÷ 7,500 = 0.14 (or 14%)

If they add a mortgage for the house, here's how it would look under each loan option:

Conventional Loan:

• Down Payment: $11,500 (5% of $230,000)

• Loan Amount: $218,500

• Estimated Monthly Payment: $1,452

• New Total Debt: $1,050 (current debts) + $1,452 (mortgage) = $2,502

• DTI: 2,502 ÷ 7,500 = 33.36%

VA Loan:

• Down Payment: $0 (no down payment required)

• Loan Amount: $230,000

• Estimated Monthly Payment: $1,530

• New Total Debt: $1,050 (current debts) + $1,530 (mortgage) = $2,580

• DTI: 2,580 ÷ 7,500 = 34.40%

USDA Loan:

• Down Payment: $0 (no down payment required)

• Loan Amount: $230,000

• Estimated Monthly Payment: $1,530

• New Total Debt: $1,050 (current debts) + $1,530 (mortgage) = $2,580

• DTI: 2,580 ÷ 7,500 = 34.40%

These DTIs are all under the 43% mark, so Carlos and Emily would likely qualify for any of these loans. They’d be in a strong position to buy the home of their dreams.

Learn more from our experts!

How to Lower Your DTI Before Buying a Home

If your DTI is too high, here are ways to lower it:

1. Pay Down Debt

If you pay off your credit card or personal loan, your total monthly debt payments will drop. This makes your DTI better.

2. Refinance Loans

If you have a high-interest personal loan, refinancing it to a lower payment could reduce your monthly payment.

3. Increase Your Income

This isn’t always easy, but picking up a side gig, asking for a raise, or working overtime can increase your gross income, making your DTI lower.

4. Don’t Take on New Debt

Opening new credit cards or taking on a car loan right before you apply for a mortgage can make your DTI higher. Avoid it if possible.

What You Should Know About Debt-to-Income Ratio for a Mortgage

• DTI matters when it comes to mortgage approval.

• A "good" DTI is 43% or lower, but you may still qualify for an FHA loan with a DTI up to 50-57%.

• Calculate your DTI before you apply so you can plan ahead.

• Lower your DTI by paying off debt, increasing your income, or refinancing loans.

If you’re ready to figure out your DTI and see how much house you can afford, First Alliance Credit Union is here to help. Our loan officers will walk you through the process, answer your questions, and help you get one step closer to owning a home.

Need help calculating your DTI? Ask us!