DTI: The Number Lenders Love
Your Debt-to-Income (DTI) ratio is simply the percentage of your gross monthly income that goes to paying debts. It tells lenders if you can afford to take on more debt.
Front-End vs Back-End Ratio
- Front-End Ratio (Housing): PITI / Gross Income. Ideal is < 28%. Only counts housing costs (Principal, Interest, Taxes, Insurance).
- Back-End Ratio (Total): Total Debt / Gross Income. Ideal is < 36%. Includes housing PLUS credit cards, car loans, student loans.
The 43% Rule
For a Qualified Mortgage (QM), most lenders cannot approve a loan if your Back-End DTI is over 43%.
Exceptions exist (FHA allows up to 57%), but they require strict "Compensating Factors" like large cash reserves or high residual income.
How to Lower Your DTI
There are only two ways to fix a high DTI:
- Increase Income: Raise the denominator. Side hustle, promotion, second job.
- Reduce Debt: Lower the numerator. Pay off the car loan or credit card that has the highest *monthly payment* (not necessarily highest balance).
Compensating Factors
If your DTI is high (45-50%), you might still get approved if you show:
- Cash Reserves: 6 months of mortgage payments in the bank.
- High Credit Score: 760+.
- Low LTV: Putting 20-30% down.
Improving Your Credit Score
While DTI is separate, usually people with high DTI have lower scores because of "Utilization".
- Pay Down Balances: Getting reliable below 30% utilization boosts your score.
- Request Limit Increases: If you have a $5,000 limit and owe $2,500 (50% util), ask for a limit increase to $10,000. Now you owe $2,500 on $10k (25% util). Score goes up!
FAQs
- Does DTI affect credit score?
- No! Credit bureaus do not know your income, so DTI is not on your report. Lenders calculate it manually when you apply.
- Does rent count?
- Yes, for the Front-End ratio calculation if applying for a loan, existing rent obligations are replaced by proposed mortgage.
- Does alimony count?
- Yes. Alimony and Child Support obligations are treated as Debt in the Back-End Ratio. Receiving them counts as Income (if stable for 3 years).