What Debt-to-Income Ratio Do You Need to Get Approved for a Mortgage?

Key Takeaways:

• Debt-to-income ratio helps lenders determine how much house you can afford.
• A lower DTI ratio is more appealing to lenders because it shows you have more financial flexibility and are less risky to lend to.
• Borrowers with high DTI ratios may have a harder time getting approved for a mortgage.

When it comes to getting approved for a mortgage, lenders look at more than just your credit score and income. They also care about how much debt you have. Even with a strong credit score and other factors, having significant debt can make affording a home difficult, since even one unexpected expense could stretch your budget too thin.

Understanding what debt-to-income ratio you need to get approved for a mortgage can help you plan and prepare for that process. By strengthening your financial profile, you’ll put yourself in a better position to own a home.

What is debt-to-income ratio

Lenders use debt-to-income ratio to determine how much a potential borrower can afford to pay on a mortgage. This ratio includes most sources of debt and income, but it doesn’t include everyday expenses like utilities or groceries. Generally, having a higher debt-to-income ratio makes it harder to secure financing to buy a house.

How to calculate your DTI ratio

Calculating your DTI ratio is pretty straightforward. First, add up your monthly debt payments. 

These can include:

• Mortgage payments
• Rent payments
• Credit card payments
• Auto loans
• Personal loans
• Other regular debt payments

After that, simply divide that number by your gross monthly income to find your debt-to-income ratio.

Monthly debt payments / Gross monthly income = DTI

For example, let’s say you currently pay $2,000 per month on your current mortgage and $400 per month on other debts. If your gross monthly income is $7,000, your DTI would be about 34%.

($2,000 + $400) / $7,000 =  ~0.34

It’s also important to understand which expenses do and don’t factor into your DTI so you get an accurate picture of your situation. Utilities , insurance premiums, phone bills, groceries, and discretionary spending are not included

What is a good debt-to-income ratio?

In general, the lower your DTI is, the better. Following the “28/36 rule,” which says that your monthly debt shouldn’t exceed 36% of your gross monthly income, is a helpful guideline to keep your debt manageable.. 

A lower DTI not only improves your chances of getting approved, but also gives you more flexibility to handle unexpected expenses without added financial stress.

What debt-to-income ratio do you need to get approved for a mortgage?

Lenders consider several factors to determine whether to approve a mortgage application, and DTI is a key one. In many cases, lenders prefer a DTI below 36%. However, some borrowers may still qualify with a higher DTI – often up to 45% or more – depending on factors like credit score, savings, and income stability.

When is your DTI ratio too high?

Your debt-to-income ratio is generally considered too high if it exceeds your lender’s maximum ratio. This can vary by lender. Most prefer for borrowers to stay below 36%, but some will accept DTI ratios of up to 45% or higher if you have strong compensating factors, like a higher credit score or larger down payment..

DTI requirements by loan type

The type of loan you apply for can impact your required debt-to-income ratio.

How to lower your DTI ratio

Your debt-to-income ratio might be high now, but there are ways to lower it. Some strategies include:

• Pay down existing debt, especially high-interest debt.
• Increase your income by taking on work on the side, if possible.
• Avoid taking out new loans while preparing to apply
• Increase your down payment to reduce how much you need to borrow.

FAQs about debt-to-income ratio

Is debt-to-income ratio based on pre-tax income?

Yes, your gross monthly income, or pre-tax income, is used to calculate your DTI.

Is student loan debt included in the debt-to-income ratio?

If you’re currently paying off outstanding student loan debt, those monthly payments can be factored into your DTI.

Can I get a mortgage with a high DTI?

Having a high debt-to-income ratio won’t stop you from getting a mortgage. However, you may need compensating factors like a higher credit score, larger down payment, or strong savings to qualify.

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