How Debt to Income Ratio (DTI) Affects Mortgages (2024)

FAQs

How does DTI affect mortgages? ›

Essentially, the lower your debt and the higher your income, the more you'll be approved for. In most cases, a lender will want your total debt-to-income ratio to be 43% or less, so it's important to ensure you meet this criterion in order to qualify for a mortgage.

For FHA and VA loans, the DTI ratio limits are generally higher than those for conventional mortgages. For example, lenders may allow a DTI ratio of up to 55% for an FHA and VA mortgage. However, this can vary depending on the lender and other factors.

According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.

According to the Federal Deposit Insurance Corp., lenders typically want the front-end ratio to be no more than 25% to 28% of your monthly gross income. The back-end ratio includes housing expenses plus long-term debt. Lenders prefer to see this number at 33% to 36% of your monthly gross income.

Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI. For more on Wells Fargo's debt-to-income standards, learn what your debt-to-income ratio means.

The maximum DTI ratio allowed for an FHA loan varies by lender and is typically between 43% to 50%. At Better Mortgage, there are circ*mstances where up to 57% is allowed.

FHA loans and VA loans allow for the highest DTI ratios— provided those applicants show a strong credit history and financial reserves. Being able to make a large down payment helps, too.

Key takeaways

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

While you can have a high DTI and qualify for a mortgage loan, it's best to look for ways to reduce it. Lenders are typically less willing to approve mortgage loans for borrowers with high debt-to-income ratios. If a borrower qualifies for the loan, the lender may ask them to pay a higher interest rate.

How much debt is too much to buy a house? ›

The 28/36 rule for housing expenses says that no more than 28% of your gross monthly income should go to your housing payment (like rent or mortgage payment) and no more than 36% of your gross income to paying total debt, such as your loans and credit cards.

How much do I need to make to buy a $300K house? You'll likely need to make about $75,000 a year to buy a $300K house. This is an estimate, but, as a rule of thumb, with a 3 percent down payment on a conventional 30-year mortgage at 7 percent, your monthly mortgage payment will be around $2,250.

A household should spend a maximum of 28% of its gross monthly income on total housing expenses according to this rule, and no more than 36% on total debt service. This includes housing and other debt such as car loans and credit cards. Lenders often use this rule to assess whether to extend credit to borrowers.

Ideally, your front-end HTI calculation should not exceed 28% when applying for a new loan, such as a mortgage. You should strive to keep your back-end DTI ratio at or below 36%.

Debt-to-income (DTI) ratio: Your DTI ratio is your total monthly debt payments divided by your gross monthly income. If your DTI is above the 45% threshold, your PMI may cost significantly more. Calculate your DTI here. Property occupancy: When you apply for a mortgage, you'll be asked how your property will be used.

How do I calculate my debt-to-income ratio? To calculate your DTI, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.