What is a good debt-to-income ratio for a mortgage?

If you’re taking the plunge and diving into homeownership, you may wonder what factors mortgage companies use to determine how much you’ll be able to afford. Besides your credit score and job stability, a debt-to-income ratio (DTI) of 36% or less is ideal and a major indicator of your financial health and ability to pay off your mortgage. It’s crucial to consider your DTI, since it’ll help you figure out how much debt you’ll be dealing with every month as a homeowner.

Let’s explore what makes a good DTI, how to achieve it and what types of loans may work best for you if your DTI is higher. After all, buying a home is one of the most important financial decisions you’ll ever make — you’ll want to go in prepared without any surprises.

Your DTI is a percentage: it’s the ratio of your gross monthly income that goes towards your monthly debt payments. If you’re applying for a mortgage, you’d want a lower DTI to assure lenders that you’re already able to pay off existing monthly debts.

Your gross monthly income is the sum of all of your earnings, including hourly wages, salary and tips before taxes are taken out. Freelance paychecks, overtime or bonus pay, rental property profits and investment income can also contribute to your gross monthly income.

Monthly debt payments include auto and personal loans; credit lines; child support; alimony; minimum payment amounts of your credit cards and other mortgages. Student loans are also factored in but may be treated differently than other debts. For example, regarding Freddie Mac and Fannie Mae conventional loans, lenders can exclude your student loans if you have less than 10 months of payments left, or if you can qualify for loan forgiveness at the end of a deferment or forbearance. Utilities such as water, gas and electric bills, as well as auto or health insurance, are not part of this debt.

Your DTI is incredibly important to lenders because it shows your ability to manage monthly mortgage payments and repay debts. If more than half of your income is devoted to debt repayment, it’s possible you’ll default on those debts when unexpected expenses come up. As a result, this reduces the likelihood of your mortgage application being accepted.

To calculate your DTI, divide your total monthly debt by your gross monthly income and multiply by 100. Alternatively, you can also use our Pre-qualification Mortgage Calculator to quickly calculate your DTI.

If your DTI ratio is 36% or lower, lenders are more likely to approve your mortgage loan.4 Additionally, your monthly payments could be lower because you pose less of a financial risk to lenders.

The lower your DTI, the better your interest rate could be, which is one of the key factors that goes into your overall mortgage payment. A low DTI can even help you secure a lower interest rate for financing opportunities in other areas of your life, such as auto loans and new credit cards.

This depends on the type of loan you’d like to apply for, as well as the lender. Below are a few examples of DTI limits for three popular loan programs.

• FHA loans, which are issued by the Federal Housing Administration (FHA), allow a maximum DTI of 43% for most borrowers. However, a DTI of 50% may be allowed in some cases, such as having a credit score of 580 or above, and having verified cash reserves or residual income. FHA loans have more flexible qualification requirements compared to other home loan types.
• Freddie Mac and Fannie Mae allow DTI ratios up to 50%, if borrowers have good credit scores (620+). Borrowers can also take advantage of lower interest rates on their conforming loans.
• For VA loans, the acceptable DTI maximum is 41%. You may still be able to work with your lender if your DTI is higher than that ratio, depending on any special circumstances.

There are still ways to secure a mortgage loan even if you have existing debt or a high DTI ratio. Connect with one of our loan officers near you to learn your options.

Ultimately, you can either increase your income or reduce your debt. Consider renegotiating your salary, taking a part-time job, or earning certifications and new skills; however, we don’t recommend pursuing another job during the application process, as long-term stability in the same job is one of the factors lenders use to qualify you for a loan. When it comes to paying down your debt, it may be worth speaking to a financial advisor on a plan, since borrowers who show they can manage debt with responsible payments can maintain a healthy credit score and credit history.

Understanding your DTI and maintaining a healthy ratio is an important financial wellness strategy that will help you reach your homeownership goals sooner. When you’re ready for the next step, we’ll be here for you.