What debt-to-income ratio means and why lenders use it

Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward debt payments. Lenders calculate it by adding up all your monthly debt obligations—mortgage, car loans, student loans, credit cards, personal loans—and dividing that total by your gross monthly income before taxes.

Lenders use this number because it shows them how much of your paycheck is already spoken for. A person earning $5,000 a month with $1,000 in debt payments has a 20% DTI. The same person with $2,000 in debt payments has a 40% DTI. The higher the ratio, the riskier you look as a borrower, because less of your income is available for a new loan payment or an emergency.

Different types of loans have different DTI limits. Mortgage lenders often want to see 43% or lower, though some will go higher. Auto lenders and credit card companies typically look at your DTI along with other factors like credit score and payment history. Student loan servicers may not check DTI at all.

Key Takeaways

  • Debt-to-income ratio is calculated by dividing your total monthly debt payments by your gross monthly income, then multiplying by 100 to get a percentage.
  • Lenders include mortgage payments, car loans, student loans, credit cards, and personal loans in the calculation, but usually not utilities, groceries, or insurance.
  • A mortgage lender typically wants to see a DTI of 43% or lower, though some programs allow up to 50%.
  • You can lower your DTI by paying down existing debt or increasing your income, both of which make you a more attractive borrower.

The step-by-step calculation

Start by listing every monthly debt payment you make. Write down the minimum payment amount for each one, not the balance owed. For a mortgage, use your actual monthly payment. For credit cards, use the minimum payment shown on your statement. For car loans and personal loans, use the scheduled monthly payment. For student loans, use whatever you pay each month—whether that is the standard payment, an income-driven repayment amount, or a deferment amount.

Add all these payments together. This is your total monthly debt obligation. If you have a mortgage payment of $1,200, a car payment of $350, a student loan payment of $200, and credit card minimums totaling $150, your total is $1,900.

Next, find your gross monthly income. This is your income before taxes, Social Security, or any other deductions. If you are paid a salary, divide your annual salary by 12. If you are paid hourly, multiply your hourly rate by the number of hours you typically work per week, then multiply by 52 weeks and divide by 12. If you are self-employed, use your average monthly income from the past two years. Include income from a spouse or co-borrower if you are explore for a joint loan.

Divide your total monthly debt payments by your gross monthly income. Using the example above: $1,900 divided by $5,000 equals 0.38. Multiply by 100 to convert to a percentage: 38% DTI.

What counts and what does not count

Lenders include any debt payment you are legally obligated to make each month. This covers mortgage payments, home equity lines of credit, car loans, student loans, personal loans, and credit card minimum payments. If you are paying child support or alimony, those count too. Some lenders also include rent payments if you are explore for a mortgage and do not currently own a home.

Lenders do not count utilities, groceries, insurance premiums, phone bills, or gas. They do not count medical debt that is not in active repayment. They do not count money you owe to friends or family unless it is a formal loan with a documented monthly payment. The reason is straightforward: they only care about obligations that show up on your credit report or that you have disclosed to them.

One exception: if a lender sees a collection account or a judgment on your credit report, they may add an estimated monthly payment to your DTI calculation even if you are not currently paying it. This protects them from lending to someone who has ignored a debt.

Front-end and back-end ratios

When you explore for a mortgage, lenders often look at two different DTI numbers. The front-end ratio (also called the housing ratio) includes only your housing payment—mortgage principal, interest, taxes, insurance, and homeowners association fees if applicable. Most lenders want this to be 28% or lower.

The back-end ratio (also called the total debt ratio) includes your housing payment plus all other debt payments. This is the number most people mean when they talk about DTI. Most lenders want this to be 43% or lower, though some programs go up to 50%.

A lender might approve you if you meet the front-end limit but fail the back-end limit, or vice versa. For example, if your housing payment is 25% of income but your total debt is 45%, some lenders will ask you to pay down other debts before they will approve the mortgage. Others will deny you outright.

How to lower your debt-to-income ratio

The most direct way to lower your DTI is to pay down existing debt. Paying off a car loan or credit card reduces your monthly obligations when ready. Even paying down a credit card balance without closing the account helps, because most lenders calculate credit card debt as 5% of the balance (not the minimum payment), so a $5,000 balance counts as $250 in monthly debt.

You can also lower your DTI by increasing your income. A raise, a second job, or income from a spouse or co-borrower all count. If you are self-employed, showing two years of consistent income history helps lenders feel confident about your earnings.

If you are explore for a mortgage and your DTI is too high, some lenders will let you remove a co-borrower's debt from the calculation if that person is not on the mortgage. This is rare and usually requires that person to have no connection to the property, but it is worth asking about.

Common mistakes when calculating DTI

The biggest mistake is using net income instead of gross income. Your net income is what hits your bank account after taxes. Lenders always use gross income because it shows your true earning power. If you earn $60,000 a year, your gross monthly income is $5,000, not the $3,500 or $3,800 that might actually arrive in your paycheck.

Another mistake is forgetting to include all debt. People often forget about medical debt in repayment, child support, or a personal loan from a family member that they are paying back. If a lender discovers debt you did not disclose, they may deny your process or require you to pay it down.

A third mistake is using the balance owed on a credit card instead of the minimum payment. If you owe $10,000 on a credit card, the balance is not your monthly obligation. Your monthly obligation is the minimum payment, which might be $200. However, some lenders use a different method: they calculate 5% of the balance as the monthly obligation, which would be $500. Ask your lender which method they use.

DTI limits by loan type

Mortgage lenders are the strictest about DTI. Conventional mortgages typically require a back-end DTI of 43% or lower. FHA loans (insured by the Federal Housing Administration) often allow up to 50% DTI. VA loans (for military members and veterans) may allow up to 60% DTI in some cases. USDA loans (for rural properties) typically cap out at 41% to 43%.

Auto lenders and credit card companies do not publish strict DTI limits the way mortgage lenders do. They look at DTI as one factor among many, including your credit score, payment history, and the value of the asset you are borrowing against. A person with a 50% DTI and a 750 credit score might get approved for a car loan, while someone with a 40% DTI and a 600 credit score might not.

Student loan servicers rarely check DTI before disbursing federal student loans. Private student loan lenders may check DTI, especially for larger loans or for borrowers without an established credit history.

Frequently Asked Questions

Does my spouse's debt count toward my DTI if we are not explore for a loan together?

No. If you are explore for a loan in your name only, only your own debt and income count. Your spouse's debts and income do not appear on your credit report and are not your legal obligation, so lenders do not include them. If you are explore together, both of your debts and income are combined.

What if I have a credit card with a $0 balance?

A credit card with a $0 balance still counts toward your DTI if the card is open. Lenders assume you could charge it up again, so they calculate a monthly obligation based on your credit limit. Most use 5% of the limit as the assumed monthly payment. If your limit is $5,000, lenders may count $250 as your monthly obligation even though you owe nothing.

Can I lower my DTI by closing credit cards?

Closing a credit card can actually hurt your DTI in the short term. When you close a card, the available credit disappears, which can lower your credit score. A lower credit score may make lenders less willing to approve you or offer you better terms. It is usually better to pay down the balance and leave the card open.

What happens if my DTI is too high for a mortgage?

You have a few options. You can pay down existing debt to lower your monthly obligations. You can wait and save for a larger down payment, which lowers the mortgage amount and the monthly payment. You can look for a less expensive property. Or you can ask a co-borrower with lower debt to explore with you, which combines both of your incomes and may lower the combined DTI.

Do student loan payments in deferment or forbearance count toward DTI?

If your student loans are in deferment or forbearance and you are not making payments, most lenders will not count them. However, some lenders estimate a payment based on your loan balance and include it anyway. Ask your lender directly what they will count, especially if you have a large student loan balance.