Debt-to-Income Ratio: What Lenders Want

Your debt-to-income ratio (DTI) is one of those numbers that quietly controls huge parts of your financial life. It determines whether you get approved for a mortgage, what interest rate you're offered, and even whether a landlord will approve your rental application. Yet most people have no idea what theirs is.

Let's change that. Here's everything you need to know about DTI: how to calculate it, what lenders consider "good," and - most importantly - how to improve yours if it's too high.

What Is Debt-to-Income Ratio?

Your DTI ratio is simply your total monthly debt payments divided by your gross monthly income (that's your income before taxes and other deductions). It's expressed as a percentage. If you earn $5,000/month gross and your total monthly debt payments are $1,500, your DTI is 30%.

The formula:

Important: DTI uses gross income, not take-home pay. And "debt payments" means the minimum required payments on all your debts, not your total balances. Lenders care about your monthly obligations relative to your monthly earnings.

Front-End vs. Back-End DTI

Lenders actually look at two versions of your DTI, especially for mortgage applications:

Front-End DTI (Housing Ratio)

This measures only your housing costs against your income. It includes your mortgage payment (principal, interest, taxes, and insurance - often called PITI), plus HOA fees if applicable. Most lenders want this at or below 28%.

Back-End DTI (Total Debt Ratio)

This is the big one. It includes all your monthly debt obligations: housing costs plus credit cards, car loans, student loans, personal loans, child support, and any other recurring debt payments. Most conventional lenders want this at or below 36%, though many will go up to 43% with compensating factors.

What Counts as "Debt" in Your DTI?

This trips people up. Not every monthly expense counts. Here's what's included:

• Mortgage or rent payment
• Credit card minimum payments
• Auto loan payments
• Student loan payments
• Personal loan payments
• Child support or alimony
• Any other loan obligations on your credit report

And here's what is not included:

• Utilities (electric, water, internet)
• Groceries and food
• Health insurance premiums
• Cell phone bills
• Subscriptions (Netflix, gym, etc.)
• Transportation costs (gas, maintenance)
• Income taxes

This is why DTI can be misleading. Someone with a 25% DTI might actually be stretched thin if they live in a high-cost area with expensive utilities, healthcare, and commuting costs. DTI measures debt obligations specifically, not overall financial health.

What's a Good DTI Ratio?

Here's how lenders generally evaluate your back-end DTI:

• Under 36%: Excellent. You'll qualify for the best rates and terms on most loans. Lenders love this range.
• 36-43%: Acceptable. You can still qualify for most mortgages, but you may not get the absolute best rates. Some lenders will want to see other strengths (high credit score, large down payment, significant savings).
• 43-50%: Concerning. According to the CFPB's Qualified Mortgage rules, 43% is a key threshold. Some lenders will go higher, especially for FHA loans (which allow up to 50% in certain cases), but you'll face higher rates and more scrutiny.
• Above 50%: Difficult. Most traditional lenders won't approve you. At this level, more than half your gross income goes to debt payments, leaving very little for taxes, savings, and living expenses.

How Different Loan Types View DTI

Not all lenders use the same thresholds:

• Conventional mortgages: Generally want back-end DTI under 36%, though most will approve up to 45% with strong compensating factors.
• FHA loans: More flexible, often approving DTIs up to 43%, and sometimes up to 50% with compensating factors like a high credit score or substantial reserves.
• VA loans: No fixed DTI limit, but loans with DTIs above 41% require additional scrutiny.
• Auto loans: Lenders vary widely, but most prefer total DTI under 40-45%.
• Personal loans: Online lenders may approve DTIs up to 50%, but with higher interest rates.

Model Your Debt Payoff

If your DTI is too high, the most direct fix is paying down debt. Use the calculator below to see how different payoff strategies affect your timeline and total interest paid.

How to Lower Your DTI

There are really only two levers: reduce your debt payments or increase your income. Here are specific tactics for each:

Reduce Your Monthly Debt Payments

• Pay off small debts entirely. Eliminating a $200 car payment drops your DTI immediately. Focus on debts you can clear quickly.
• Refinance to lower rates. Refinancing a car loan or student loan to a lower rate reduces your monthly payment.
• Consolidate credit card debt. A personal loan with a lower monthly payment than your combined card minimums improves your DTI.
• Switch to income-driven repayment. For student loans, income-driven plans can dramatically lower your monthly payment, which directly improves DTI.
• Pay down credit card balances. Even if you can't eliminate the debt, lowering balances reduces your minimum payments.

Increase Your Gross Income

• Negotiate a raise. Even a modest raise helps. A $5,000 annual raise adds roughly $417/month to your gross income.
• Add a side income. Freelance work, part-time jobs, or gig work all count. For mortgage qualification, you'll typically need to show at least 2 years of consistent side income for it to count.
• Include all income sources. Make sure you're counting bonuses, commissions, rental income, and investment income if they're consistent enough to document.

DTI vs. Credit Score: Which Matters More?

Both matter, but they measure different things. Your credit score reflects your history of managing debt (payment history, utilization, length of history). Your DTI measures your current debt load relative to income. A person can have an 800 credit score and a 50% DTI if they've always paid on time but carry a lot of debt relative to income.

For mortgage qualification, lenders look at both. A high credit score can sometimes compensate for a slightly high DTI, and vice versa. But neither one alone guarantees approval. Think of them as two independent measures of your financial health.

The Bottom Line

Your debt-to-income ratio is a simple but powerful number. It affects your ability to borrow, the rates you're offered, and even your financial stress levels. If you're planning a major purchase like a home or car, check your DTI well in advance so you have time to improve it if needed. The sweet spot is under 36% for back-end DTI and under 28% for front-end. Get there, and you'll have access to the best loan terms available. More importantly, you'll have breathing room in your budget for the rest of life.