When buying a mortgage, your debt-to-income ratio determines how much you will be approved for.
The maximum DTI ratio for most loans is 43%, and in some cases, lenders will allow up to 50%.
This article looks at debt-to-income ratios to find out the ideal ratio when buying a house.
Current Mortgage Rates (Novermber 2020) | ||
Loan Term | Interest rate | APR |
30-year fixed-rate mortgage | 3.15% | 3.38% |
15-year fixed-rate mortgage | 2.91% | 3.06% |
5/1 adjustable-rate mortgage | 3.05% | 3.25% |
See how much you can afford using this calculator, including PMI and taxes.
What Is the Debt-to-Income Ratio?
Your debt-to-income ratio (DTI ratio) is the amount of your income that goes towards your monthly debt obligations. There are two types of DTI ratios, your
Front-End DTI Ratio – Your front-end ratio is the amount of your income that does towards your debt before factoring in your monthly mortgage payments. Ideally, your front end ratio should not exceed 26%.
Back-End DTI Ratio – The back-end DTI ratio is the amount of your income that goes towards your monthly debt obligations, including your estimated mortgage payment. The maximum back-end DTI ratio is 43%. In some cases, a DTI ratio as high as 50% may be accepted.
What’s the Ideal DTI ratio for a Mortgage
36% is the ideal back-end DTI ratio for a mortgage loan.
Ideally, the maximum debt-to-income ratio lenders prefer to see is 36%. However, 43% is the typical maximum DTI ratio accepted, and in some cases, 50%. But 36% is preferred. It ensures that you have enough money each month to cover any unanticipated expenses.
How to Calculate Your Debt-to-Income Ratio
- Take your total monthly debt payments, including all loans and credit cards.
- Divide your total monthly debt payments by your gross income.
- Multiply by 100 to get your debt-to-income ratio.
For example, if your make $60,000 per year, your gross income is $5,000 per month.
Find out your total monthly payments on your credit cards, auto loans, and any other loan with set monthly installment payment.
- Auto loan – $500
- Credit card minimum payments – $300
- Personal loan – $200
Your total monthly debt obligations are $1,000, now divide it by your gross income before taxes ($5,000) 20% is your front-end DTI ratio.
To find your back-end ratio, your lender will give you your estimated mortgage payment. If the maximum debt-to-income ratio is 43%, then you’re limited to a monthly mortgage payment of $1,150.
Working with a High DTI Ratio
The maximum debt-to-income ratio lenders accept for a mortgage loan is 43%. In some cases, they can accept ratios as high as 50% if you have compensating factors such as great credit.
Compensating Factors
Things such as a high credit score or being with your current employer for many years strengthen your loan application allowing lenders to increase the DTI requirement.
Compensating Factors |
* Limited payment shock |
* 5+ years with the same employer or in the same industry |
* High income |
* Large amount in savings |
* Good credit |
* 20% down payment |
* Low debt-to-income ratio below 36% |
* Residual Income |
* Limited debt (credit cards, auto loan, etc.) |
Increase Your Credit Score
The interest rate you receive on a mortgage is directly tied to your credit score. The higher your credit score is, the lower your mortgage rate will be. You can reduce your DTI ratio by lowering the rate on your loan.
Steps to Improve Your Credit Score
Pay down credit card debt | Your credit utilization ratio is the amount of available credit you're using; it accounts for 30% of your overall FICO score. Try to pay your balances to less than 10-15% of the card's limit. |
Don't apply for credit | Do not apply for new lines of credit or loans. Too many credit inquiries can lower your credit score. You're also adding debt to your report, which can negatively affect your score. |
Pay your bills on time | Your payment history accounts for 35% of your overall score. Don't miss a payment on any bills, set up auto-pay to ensure you don't miss any payments. |
Dispute Innaccurate Items | You can dispute accounts you don't believe are accurate with the credit bureaus directly. They will investigate the account and must either verify it or delete it within 30 days. |
Get added as an authorized user | If you know someone who has a credit card in good standing with no negative account activity ask them to add you to their account as an authorized user. The entire account history will be added to your credit profile which can increase your credit score. |
Compare Loan Estimates
The interest rate and closing costs lenders charge will vary widely from lender to lender. It’s important that you compare loan estimates from multiple lenders to ensure you’re getting the most competitive rates. Everything can be negotiated, and that includes your loan terms. use loan estimates you get from other lenders to help you negotiate a better deal on your mortgage.
