What a debt ratio is and why lenders look at it
A debt ratio is a number that shows how much of your income goes toward debt payments each month. Lenders use it to decide whether to approve you for a mortgage, car loan, or credit card. The lower your ratio, the safer you look as a borrower.
There are two main debt ratios lenders calculate. The front-end ratio (also called the housing ratio) measures only your housing payment against your income. The back-end ratio (also called the debt-to-income ratio) measures all your monthly debt payments against your income. Most lenders care more about the back-end number because it shows your total monthly obligations.
Understanding how to calculate these yourself lets you know where you stand before you explore for credit. You can also use the numbers to decide whether taking on new debt makes sense for your situation.
Key Takeaways
- The back-end debt ratio divides your total monthly debt payments by your gross monthly income and is expressed as a percentage.
- To calculate it, add up all monthly payments: mortgage or rent, car loans, student loans, credit cards, and any other regular debt obligations.
- Most lenders want to see a back-end ratio of 43 percent or lower, though some will go higher depending on your credit score and down payment.
- The front-end ratio measures only your housing payment and is usually required to be 28 percent or lower.
- You can improve your ratio by paying down debt, increasing your income, or both.
How to calculate your back-end debt ratio
Start by listing every monthly debt payment you make. Include your mortgage or rent payment, car loans, student loans, credit card minimum payments, personal loans, medical debt payments, and any other regular monthly obligations. Do not include utilities, groceries, insurance premiums, or other living expenses—only debt.
Add all these payments together to get your total monthly debt. For example, if you pay $1,200 for a mortgage, $350 for a car loan, $200 for student loans, and $100 in credit card minimums, your total is $1,850.
Next, find your gross monthly income. This is your income before taxes are taken out. If you are paid annually, divide your salary by 12. If you are self-employed, use your average monthly income from the past two years. Include income from your job, a second job, rental property, or any other regular source.
Divide your total monthly debt by your gross monthly income, then multiply by 100 to get a percentage. Using the example above: $1,850 ÷ $4,500 (gross monthly income) × 100 = 41 percent back-end ratio.
How to calculate your front-end debt ratio
The front-end ratio is simpler because it uses only one payment. Take your monthly housing payment—whether that is a mortgage, rent, or both if you pay both—and divide it by your gross monthly income, then multiply by 100.
If your mortgage is $1,200 and your gross monthly income is $4,500, your front-end ratio is $1,200 ÷ $4,500 × 100 = 27 percent. Most lenders want this number to be 28 percent or lower. Some lenders will accept up to 31 percent if you have a strong credit score and a large down payment.
If you are renting and explore for a mortgage, some lenders will calculate your front-end ratio using only the new mortgage payment, not your current rent. Ask the lender which number they use.
What debt counts and what does not
Lenders count any monthly payment you are legally obligated to make. This includes mortgages, car loans, student loans, credit card minimum payments, personal loans, medical debt on a payment plan, child support, and alimony. If you co-signed a loan for someone else, that payment counts even if the other person makes it.
Lenders do not count utilities, phone bills, groceries, gas, insurance premiums, or other living expenses. They also do not count medical bills you have not put on a payment plan, or debts that are in collections and you are not actively paying. Some lenders will not count student loans if you are in deferment or forbearance, though this varies by lender.
Credit card debt is tricky. If you have a balance, lenders count the minimum payment, not the full balance. If you have a credit limit but no balance, most lenders do not count it, though some will count a small percentage of your available credit as a potential payment.
What lenders expect to see
Most conventional mortgage lenders want a back-end ratio of 43 percent or lower. Some will go to 50 percent if you have a high credit score, a large down payment, or significant savings. FHA loans (mortgages insured by the Federal Housing Administration) often allow up to 50 percent, and VA loans (for military members and veterans) sometimes allow higher ratios.
For car loans and credit cards, lenders look at your back-end ratio as part of the decision but may also look at your credit score and payment history. A high ratio does not automatically disqualify you, but it makes approval less likely and may result in a higher interest rate.
The front-end ratio is usually stricter. Most lenders want it at 28 percent or lower. If your front-end ratio is too high but your back-end ratio is acceptable, you may be able to lower your housing payment by putting down a larger down payment or looking at a less expensive home.
How to improve your debt ratio
The fastest way to lower your ratio is to pay down debt. Every dollar you pay toward a loan reduces your monthly payment and improves both ratios. Paying off a car loan or credit card has an when ready effect. Even paying extra on your student loans or mortgage will help.
If you cannot pay down debt quickly, increasing your income will also lower your ratio. A raise, a second job, or additional income from any source raises your gross monthly income and improves both numbers. If you are self-employed, documenting higher income on your tax return will help when you explore for credit.
You can also improve your ratio by refinancing high-payment debt into a longer loan term, which lowers the monthly payment. This does not reduce the total amount you owe, but it does improve the numbers lenders see. Be aware that extending a loan term usually means paying more interest overall.
If you are explore for a mortgage, putting down a larger down payment lowers the loan amount and the monthly payment, which improves both your front-end and back-end ratios.
Common mistakes when calculating your ratio
The most common mistake is using net income (take-home pay) instead of gross income. Lenders always use gross income, so your calculation will be wrong if you use the number on your paycheck. Use your salary before taxes, or ask your employer for a recent pay stub that shows gross income.
Another mistake is forgetting to include all debt. People often forget about medical payments, child support, or loans from family members. If you are not sure whether something counts, include it in your calculation—it is better to overestimate than to be surprised when a lender pulls your credit report.
Some people also forget that rent counts as a housing payment for the front-end ratio. If you are renting and explore for a mortgage, your current rent payment is part of your housing costs until the mortgage closes.
Frequently Asked Questions
What is a good debt ratio?
A back-end ratio below 36 percent is considered very good, and most lenders will approve you easily at that level. Between 36 and 43 percent is acceptable to most lenders. Above 43 percent makes approval harder, though some lenders will still work with you if your credit score is high or you have a large down payment.
Do student loans count differently than other debt?
Most lenders count student loan minimum payments the same way they count other debt. However, if your loans are in deferment or forbearance and you are not making payments, some lenders will not count them. Ask your lender whether they count deferred student loans before you explore.
Does my spouse's debt count if we are explore together?
Yes. When you explore for a joint mortgage or loan, lenders combine both incomes and both debts to calculate the ratio. If one spouse has significant debt, it affects both people's ability to borrow. Some lenders will calculate ratios separately if you ask, but most require a joint calculation.
Can I lower my ratio by paying off a credit card before I explore?
Yes, but only if you close the account or stop using it. If you pay off a balance but keep the card open, some lenders will still count a portion of your available credit as potential debt. Closing the account after you pay it off is the safest approach, though it may temporarily lower your credit score.
What if my ratio is too high to get approved?
You have three options: pay down debt to lower your ratio, increase your income, or wait a few months while you do both. You can also look for a lender with higher ratio requirements—some credit unions and smaller lenders are more flexible than large banks. A mortgage broker can help you find lenders willing to work with your specific situation.