When you apply for a mortgage, auto loan, or personal loan, lenders don't just look at how much money you make—they look at how much of that money is already promised to someone else. This measurement is called your Debt-to-Income (DTI) ratio.
Disclaimer: This guide provides educational information on how lenders calculate DTI. It is not financial or lending advice.
How to Calculate Your DTI
Calculating your DTI is straightforward. You divide your total fixed monthly debt payments by your gross monthly income (your income before taxes are taken out), and multiply by 100 to get a percentage.
DTI Formula
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
Example:
- Gross Monthly Income: $6,000
- Monthly Auto Loan: $400
- Monthly Student Loan: $200
- Minimum Credit Card Payments: $100
- Expected New Mortgage Payment: $1,500
Total Monthly Debt = $2,200.
$2,200 ÷ $6,000 = 0.366.
Your DTI is 36.6%.
Note: DTI does not include living expenses like groceries, utility bills, health insurance, or cell phone bills. It only includes fixed debt obligations.
Front-End vs Back-End DTI
Lenders typically look at two different DTI ratios when you apply for a mortgage:
- Front-End DTI: Only calculates your housing-related expenses (mortgage principal, interest, property taxes, insurance, and HOA fees) divided by your gross income. Lenders generally want this under 28%.
- Back-End DTI: Calculates your housing expenses plus all other monthly debt obligations divided by your gross income. Lenders generally want this under 36%, though many will accept up to 43% or even 50% for certain loan types.
Why Lenders Care About DTI
Lenders use DTI to measure risk. Statistical data shows that borrowers with a high DTI are significantly more likely to default on their loans if they experience a financial emergency (like a medical bill or temporary job loss) because their paychecks are already stretched too thin.
How to Improve Your DTI
If your DTI is too high to qualify for the loan you want, you only have two mathematical options to fix it:
- Decrease your debt: Aggressively pay off a car loan or credit card balance before applying for the mortgage. If you eliminate a $400/month car payment, your DTI instantly drops.
- Increase your income: Ask for a raise, take on a side hustle, or apply for the loan with a co-borrower whose income can be added to the calculation.
To see how a new mortgage payment will affect your monthly budget and DTI, run your numbers through our Mortgage Calculator.