Your debt-to-income (DTI) ratio is a key metric that mortgage lenders use to assess your ability to manage monthly payments and repay debts. A lower DTI ratio indicates that you have a good balance between debt and income, making you a less risky borrower. This guide will walk you through everything you need to know about DTI.

What is DTI?

Your DTI ratio is your total monthly debt payments divided by your gross (pre-tax) monthly income. This number is expressed as a percentage. Lenders use it to measure your ability to take on a new mortgage payment.

How to Calculate Your DTI Ratio

The formula is simple:

DTI = (Total Monthly Debt Payments / Gross Monthly Income) x 100

Here’s a step-by-step guide:

1. Add Up Your Monthly Debt Payments: Include rent or current mortgage, auto loans, student loans, personal loans, and minimum credit card payments. Do not include utilities, groceries, or other living expenses.
2. Determine Your Gross Monthly Income: This is your total income before taxes and other deductions are taken out.
3. Divide and Multiply: Divide your total monthly debts by your gross monthly income, then multiply by 100 to get the percentage.

Example: If your monthly debts are $2,000 and your gross monthly income is $6,000, your DTI is $2,000 / $6,000 = 0.333, or 33.3%.

What is a Good DTI Ratio for a Mortgage?

While it varies by lender and loan type, here are some general guidelines:

• 36% or less: Ideal. You are in a strong borrowing position.
• 37% to 43%: Good. You will likely qualify for most loans, but may not get the best interest rates.
• 44% to 50%: Acceptable for some loan types (like FHA), but you will have fewer options.
• 50% or higher: High risk. It will be difficult to qualify for a mortgage.

The maximum DTI for a conventional loan is typically 43%, although some lenders may go up to 50% for borrowers with strong compensating factors, such as a high credit score or large cash reserves.