• Debt-to-income (DTI) ratios measure how much of a borrower’s income is allocated to repaying debt obligations.
  • To help prevent borrowers from overextending themselves financially, lenders consider DTI ratios when reviewing applications for mortgage loans. 
  • The 28/36 Rule recommends keeping housing costs below 28% of pre-tax income and total debt payments below 36%. However, this is not a strict requirement, and many lenders may approve mortgage applicants with DTIs over 36%.

To qualify for a mortgage loan to buy a home, you need to show lenders that you have a history of handling debt responsibly and are financially able to repay the loan. Several factors are used to determine your creditworthiness and financial stability, including your credit score, down payment amount, and debt-to-income ratio.   

This article will focus on debt-to-income ratios, explaining:

  • What DTI is
  • How DTI is used in the mortgage application process
  • How DTI is calculated
  • What number constitutes a “good” DTI
  • How to improve your DTI when applying for a home loan

What Is a Debt-To-Income Ratio?

A debt-to-income ratio is the total of a person’s monthly debt payments, expressed as a percentage of that person's income.[1] This ratio shows how much of someone’s income must be allocated to repaying debt. 

How Is DTI Used in Mortgage Approval?

DTI is important in mortgage approval because it helps lenders confirm that a borrower has enough income to cover the new home loan on top of their existing debts while still leaving money for standard living expenses.

How To Calculate Your Debt-To-Income Ratio

The formula for calculating DTI is: DTI = total monthly debt payments / gross income

To calculate your DTI, simply divide your total monthly debt payments by your total gross (pre-tax) income.[2]

For example, if your monthly debt payments total $3,000, and your gross income is $9,000 per month, your DTI is 33% (3,000 / 9,000 = 33%). 

What Is a Good Debt-To-Income Ratio for a Mortgage?

DTI limits for mortgages vary by home loan type and by lender. Lenders might also allow exceptions for borrowers with high credit scores or large down payments. 

Having said that, many borrowers look to hit the 28/36 Rule when applying for a mortgage.[3]

What Is the 28/36 Rule for Mortgages?

The 28/36 Rule says that borrowers should spend no more than 28% of their gross monthly income on housing costs and no more than 36% on all debt payments.

The 28% in the 28/36 Rule is often called the front-end ratio. According to this rule, your housing costs, comprised of the following, should not exceed 28%:

The 36% in the 28/36 Rule is often called the back-end ratio. According to this rule, your housing costs (as outlined above) plus all other monthly debt obligations, including any of the following, should not exceed 36%:

  • Credit card payments
  • Auto loan payments
  • Student loan payments
  • Personal loan payments
  • Child support or alimony payments
  • Any other recurring debt payments

Essential expenses that are not debt-related (such as groceries, retirement contributions, healthcare, and transportation) are not included in your DTI.

Again, the 28/36 Rule is not a mortgage requirement. Some lenders may allow DTI to exceed 36% on certain loan types for otherwise strongly qualified homebuyers.[2] The 28/36 Rule is simply a general guide to help you understand what might be considered a “good” debt-to-income ratio for mortgages. 

How To Improve Your Debt-to-Income Ratio

There are two primary methods for improving your DTI: lower your monthly debt or increase your gross income. Here are specific tactics for each.

Ways To Lower Monthly Debt To Improve DTI

The only way to lower your front-end DTI is to reduce your housing cost. This could be done by choosing a less expensive home to purchase or making a higher down payment, which could lower the monthly payment. 

There are more options to help you lower your back-end DTI, such as:

  • Pay down high-interest credit cards. Because so much of each payment goes toward interest, a comparatively small reduction in the balance due could noticeably reduce the monthly debt obligation.
  • Pay off smaller balances. Eliminating even one small debt, such as a store credit card or personal loan, may improve your DTI.
  • Consider refinancing existing loans. Refinancing is when you replace an existing loan with a new loan under new terms. This can be done for most loan types, including mortgages, auto loans, and student loans. Under the right conditions, refinancing may lower your monthly payments, which could improve your DTI. However, there are risks. For example, if current interest rates are higher than your existing rate, it could cost you more over the long term. There are also refinancing fees to consider. Weigh the pros and cons carefully before refinancing any loan. 
  • Consider consolidating existing loans. Combining multiple debts into one loan could reduce your monthly payment by providing a lower interest rate and/or spreading the balance due over more months of payments. Before consolidating, use a debt consolidation calculator to estimate the total expense, including interest and any fees. 
  • Consider asking lenders to recast payments. If you have made lump-sum payments toward any debts in the past, such as using a tax refund to pay down more on your student loans, you can ask that lender to recalculate your monthly payments based on the current balance through a process known as recasting. 
  • Remove yourself as an authorized user on accounts with high balances. If you're an authorized user on someone else's maxed-out credit card, removing yourself may remove that debt from your DTI.
  • Avoid new debt before securing your new home loan. Hold off on financing cars, furniture, or anything else that increases your monthly debt obligations while you apply for (and finalize) your home loan.

Important note: If you are already in the process of applying for a home loan, discuss these strategies with your lender before implementing them, as any major change to your financial profile could cause the application process to start over.  

Ways To Increase Gross Income To Improve DTI

Additional income may only be considered for your DTI if it is verifiable and consistent. So, a workplace bonus or financial gift may not change your DTI. Instead, you could try increasing your income in one of the following ways:

  • Ask for a raise. A pay increase may improve your DTI quickly.
  • Work additional shifts or overtime. If you’re an hourly worker, you may increase your income to improve your DTI by working more.
  • Pick up a side hustle or part-time job. Extra income from side jobs like freelancing, tutoring, or ride-sharing may count toward the income in your DTI if the pay is documented and consistent over time.

DTI Is Just One Factor in Determining Your Mortgage Eligibility

Debt-to-income ratios are a useful tool to help quickly assess the affordability of a new home for the buyer. Keeping your total debt, including the new mortgage payment, below 36% of your gross income leaves money available for other living expenses. 

While DTI is an important metric when applying for a mortgage, it is only one factor. Additional factors, like your credit score and down payment amount, will also be considered when determining your eligibility for a home loan, so there may be some flexibility in the DTI ratio your lender will accept based on the rest of your financial profile. Learn more about how to qualify for a home mortgage loan.