What’s the Debt-to-Income Ratio and Why It Matters

When it comes to applying for a mortgage—or any type of loan—one of the most important numbers in your financial profile is your Debt-to-Income Ratio, often referred to as DTI. It plays a critical role in whether you get approved, how much you can borrow, and even the interest rate you’re offered.

Let’s take a closer look at what DTI is, why it matters so much to lenders, and what you can do to manage it wisely.

What Is the Debt-to-Income Ratio?

Your Debt-to-Income Ratio (DTI) is a simple formula that compares your monthly debt obligations to your gross monthly income (your income before taxes and deductions). It helps lenders understand how much of your income is already tied up in debt and how much room you have left for a mortgage payment.

DTI Formula:
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100

Example:
If your gross income is $6,000 per month, and your monthly debt payments (including credit cards, car loans, student loans, and estimated mortgage payment) total $2,400, your DTI is:

2,400 ÷ 6,000 = 0.40 or 40%

Why Does DTI Matter?

Lenders use DTI to assess how easily you’ll be able to take on and manage new debt. A lower DTI suggests that you have a manageable level of debt relative to your income. A higher DTI could raise concerns about your ability to make future payments, especially if your financial situation changes.

Importantly, DTI is not just used to determine whether your loan will be approved. It also impacts the terms of the loan—especially the interest rate. Even if your file is approved with a high DTI, lenders may offer you a higher-than-market interest rate to offset the perceived risk. In other words, the higher your DTI, the more you could end up paying over the life of the loan.

Two Types of DTI

Lenders typically evaluate two types of DTI ratios during the mortgage process:

1. Front-End Ratio:

• Includes only housing-related expenses: your expected mortgage payment (principal and interest), property taxes, homeowners insurance, and HOA dues (if any).
• A commonly accepted guideline is to keep this below 28–31% of your gross monthly income.

2. Back-End Ratio:

• Includes all monthly debt obligations: housing expenses plus credit card payments, auto loans, student loans, and other personal loans.
• Most mortgage programs prefer a back-end DTI below 43%, though some allow up to 50% under certain conditions.

What’s Considered a “Good” DTI?

Here’s a general guide:

• Below 36% – Considered ideal. You’re in a strong position to borrow.
• 37%–43% – Acceptable range for many loan programs.
• 44%–50% – May still be approved, depending on compensating factors (high credit score, large down payment, strong reserves).
• Above 50% – Often difficult to qualify without substantial strengths elsewhere in the application.

Even if you’re technically approved at a high DTI, it may limit your loan options or affect your ability to refinance later.

How to Improve Your DTI

If your DTI is too high, there are several steps you can take to reduce it—and strengthen your mortgage application in the process:

• Pay down existing debt: Focus on high-interest revolving debt like credit cards.
• Avoid taking on new debt: Delay large purchases or new credit applications until after your loan closes.
• Increase your income: Consider a side hustle, asking for a raise, or documenting non-traditional income streams.
• Refinance or consolidate loans: Reducing monthly payments on existing debt can improve your DTI.
• Add a co-borrower: Including a co-borrower with strong income, low DTI, and good credit can improve your overall profile. But keep in mind—adding someone with their own high debt load or poor credit could hurt more than help.

Bottom Line

Your Debt-to-Income Ratio might not be as well-known as your credit score, but it’s just as important—if not more—when it comes to qualifying for a mortgage. It directly impacts how much house you can afford, whether your loan gets approved, and what kind of interest rate you’re offered.

If you’re planning to buy a home or refinance, taking time to understand and optimize your DTI is one of the smartest moves you can make. Even small changes can lead to better loan terms, lower interest rates, and long-term savings.

Need help calculating your DTI or figuring out how to improve it before applying for a mortgage? I’m happy to walk you through it and help you plan for the best outcome. 

Reach out to me at 312-296-4175 or email me at connect@borislending.com — I am here to help you make informed, confident decisions during your homebuying journey. I lend in all 50 states and I am never too busy for your referrals!!