Debt-to-income ratio (DTI)

Before you rely on it

What to check

Include every obligation on the credit report.

The common error

Where people go wrong with debt-to-income ratio (DTI)

Leaving out a student loan in deferment or a cosigned car loan. Both count, neither is being paid today, and both have derailed approvals at the last minute.

Worked through

Debt-to-income ratio (DTI) in plain numbers

Someone earns $6,000 a month before tax. Their monthly debts are a $1,500 mortgage payment, a $350 car loan, a $250 student loan and $100 in minimum credit card payments, $2,200 in all. DTI is $2,200 ÷ $6,000, or 36.7%. Add a new $400 car payment and the total becomes $2,600, or 43.3%, and the income has not changed but the ratio moved by nearly seven points; lenders often look at two versions: the front-end ratio, housing costs only, and the back-end ratio, all debts. Guidelines for the limits vary by loan type and lender.

Easily confused

Debt-to-income ratio (DTI) and its neighbours

Debt-to-income is not credit utilization and not a credit score; it compares monthly obligations with gross income and says nothing about how you pay them. Utilization compares revolving balances with limits. A credit score summarizes payment history and other factors. DTI is also different from the debt ratio in corporate finance, which compares total debt with total assets. Rent, groceries, utilities and insurance are usually not counted in the numerator, though they consume real money, so a comfortable DTI can still be a tight budget.

In real decisions

Where debt-to-income ratio (DTI) turns up

Mortgage lenders use DTI to decide how much you can borrow. Auto and personal loan lenders check it too. Renters may be asked for it indirectly through an income multiple; people use it to see how a new payment would change their standing before applying. Debt counselors use it to size the problem. Paying off a small loan or raising income lowers it; it is one of the first numbers a lender computes, so knowing yours ahead of time saves surprises.

Know the edges

Where debt-to-income ratio (DTI) stops being reliable

The ratio uses gross income, so it ignores taxes, and two people with the same DTI can have very different take-home budgets. Variable income makes the denominator uncertain. Deferred loans and income-driven plans complicate the numerator. Different lenders count different items. A low ratio does not mean a loan is wise, and compare it with your actual budget, and leave a margin for savings and irregular expenses.

Quick answers

What people ask about debt-to-income ratio (DTI)

What DTI do lenders accept? Limits vary by loan type and lender. Many mortgage programs look for a back-end ratio somewhere in the low to mid forties, with exceptions for strong applicants. Check the program you are applying for.

Are rent and utilities part of DTI? Typically not, except when rent is being replaced by a new housing payment. DTI counts debt obligations reported on credit, plus the proposed housing payment.

How can I lower my DTI quickly? Pay off small loans with high payments, avoid new debt before applying and, where possible, increase documented income. Consolidation only helps if the total monthly payment falls.