Debt-To-Income (DTI) Ratio: Definition and How to Lower It

Read Time: 4 minutes

A debt-to-income (DTI) ratio is a financial metric that lenders use to assess an applicant’s overall debt relative to their income. Typically expressed as a percentage, it is a crucial factor in qualifying for a mortgage, as it helps lenders determine whether an applicant is financially qualified to repay a home loan. 

In addition to the DTI ratio, lenders also consider the PITI ratio, which is specifically for housing debt. The PITI ratio stands for Principal, Interest, Taxes, and Insurance, which are the four main components of a monthly mortgage payment. Like with DTI, lenders compare the  PITI payment  against the applicant’s monthly income to assess financial stability. 

You may have also heard of front end and back end DTI. These are just alternative ways to refer to overall DTI and PITI. Front end DTI is the same as PITI, and back end is the same as overall DTI.

A lower DTI ratio improves your chances of being approved for a home loan with favorable terms.

What is a Good DTI Ratio?

DTI ratio standards vary by lender and the type of loan you are applying for, but a good DTI ratio is generally considered to be 36% or lower. The maximum DTI limits for each loan type are typically:

Conventional Loans: 43%

VA Mortgages: 41%

FHA Loans: 57%

USDA Loans: 41%

Some lenders may allow slightly higher DTI ratios, especially if you have a strong credit history and other compensating factors that demonstrate your ability to manage debt responsibly.

How to Calculate DTI 

You can easily calculate your DTI ratio using Refi.com’s required income for a mortgage calculator

However, if you would like to do the math yourself, you can follow a few simple formulas. DTI is calculated by dividing the borrower’s total monthly debt payments by their gross monthly income, which looks like this:

DTI Ratio = (Total Monthly Debt Payments / Gross Monthly Income) × 100

Total monthly debt payments include all of your recurring monthly debt obligations, such as credit card payments, loans of any type, and any other outstanding debts. Gross monthly income is your total monthly income before taxes and other deductions. It includes your salary or wages, self-employment income, and any other sources of income.

For example, if your total monthly debt payments add up to $2,000, and your gross monthly income is $6,000, your DTI ratio would be:

DTI Ratio = ($2,000 / $6,000) × 100 = 33.33%

You can also calculate your PITI ratio using our mortgage loan calculator (PITI) for refinancing or home purchase payments.

Does Your DTI Affect Your Credit Score?

Your DTI ratio does not directly affect your credit score, per se. Credit scores, such as those calculated by FICO or VantageScore, are primarily based on the information in your credit reports. These scores take into account factors such as your payment history, credit utilization, length of credit history, types of credit accounts, and recent credit inquiries.

However, your DTI ratio can indirectly influence your creditworthiness and financial stability, which can, in turn, affect your credit score. Late payments, high credit utilization, and opening new lines of credit are events that get reported to credit bureaus, which in turn may indicate financial stress or risk of default.

In summary, while your DTI ratio itself is not a component of your credit score, it can indirectly influence your creditworthiness and financial stability, which, in turn, can impact your credit score. 

How to Lower DTI Ratio

Lowering your DTI ratio can improve your chances of qualifying for a home loan and potentially help you secure a more favorable interest rate. Before you apply for a home loan, here are several strategies that you can use to lower your DTI:

Pay Down Debt 

One of the most effective ways to reduce your DTI ratio is to pay down existing debts. This can include credit card balances, personal loans, car loans, and other outstanding debts. Focus on paying off high-interest debts first to free up more of your monthly income.

If you need help tracking your debt and creating a timeline to pay it off, you can take advantage of Refi.com’s “How Much Do You Owe?” calculator.

Avoid New Debt

Refrain from taking on new debt, such as financing a car or applying for additional credit cards, while you’re preparing to apply for a mortgage. New debt will increase your DTI ratio and may raise concerns for lenders.

Refinance or Consolidate 

If you have high-interest loans or credit card debt, explore mortgage refinancing or other debt consolidation strategies. Doing so has the potential to lower your interest rate, sometimes greatly, reducing your monthly debt payments.

You can also calculate how consolidating your debts would affect your finances using the Mortgage Debt Consolidation Calculator.

Increase Your Down Payment

A larger down payment can reduce the size of your mortgage and, in turn, your monthly mortgage payment. 

Consider Co-Signers or Joint Applications 

If applicable, consider involving a co-signer or applying for a joint mortgage with a partner or family member. Their income can be included in the application, potentially lowering the DTI ratio if they have a strong financial profile.

Increase the Loan Term 

Applying for a 30-year mortgage instead of a 15-year mortgage can reduce your monthly mortgage payment and lower your DTI ratio. However, this may result in paying more interest over the life of the loan.

Increase Your Income 

While it’s easier said than done, boosting your income can help lower your DTI ratio. Any additional income and earnings can offset your debt obligations and improve your DTI ratio.

Improving your DTI ratio may take time, especially if you have substantial debt. Sustainably reducing your debt and increasing your income over time is a surefire way to get closer to approval. Make sure that you can comfortably manage your mortgage payments and other financial responsibilities once you become a homeowner.

Compare Rates and Save on Your Mortgage Loan

See Today's Rates