What Is a Good Debt-to-Income Ratio?
Debt-to-income ratio is the number that decides whether you get approved and how much you can borrow. Here is how it is calculated and what counts.
Two applicants with identical credit scores can get very different loan offers. The difference is often debt-to-income ratio, or DTI, meaning the share of your gross monthly income that already goes to debt payments.
How DTI is calculated
Add up every minimum monthly debt payment, divide by gross monthly income, and multiply by 100. That is the back-end DTI. Lenders also look at a front-end ratio, which counts only housing costs.
Example: you earn $7,500 a month. Your car payment is $420, student loans $260, credit card minimums $150, and the mortgage you are applying for would be $1,900 including taxes and insurance. Total debt is $2,730, so DTI is 36.4 percent.
What counts and what does not
- Counts: mortgage or rent, auto loans, student loans, personal loans, minimum credit card payments, child support and alimony, timeshare and co-signed loans.
- Usually counts: an estimated payment for any loan in deferment or forbearance, even if you are paying nothing right now.
- Does not count: utilities, groceries, insurance premiums, phone bills, gym memberships, taxes and subscriptions.
The exclusion of living expenses is important. DTI tells the lender whether you can pay, not whether you can live. A 42 percent DTI with three children and a high cost of living feels very different from the same ratio for a single person in a low-cost market.
What counts as good
| DTI | How lenders see it | Typical outcome |
|---|---|---|
| Below 20% | Excellent | Best rates, easiest approval |
| 20-35% | Comfortable | Strong approval odds on most loans |
| 36-41% | Manageable | Approved, but pricing may be affected |
| 43-49% | Stretched | Conventional mortgage approvals usually stop at 43% |
| 50%+ | Risky | FHA may allow with compensating factors; most lenders decline |
For conventional mortgages, 43 percent is the general ceiling under the Ability-to-Repay rule, though automated underwriting can approve higher with large reserves or a long history of on-time payments. FHA loans often allow up to 50 percent.
How to lower your DTI
- Pay down revolving balances. Minimum payments on credit cards are a direct function of the balance, so reducing the balance lowers DTI immediately.
- Do not open new credit before applying for a mortgage. A new car loan at the wrong moment can kill a deal.
- Pay off small installment loans entirely. Eliminating a payment removes it from the calculation completely.
- Increase documented income. A raise, a side income stream with two years of tax returns, or adding a co-borrower all help.
- Consider a smaller loan. Sometimes the answer is a less expensive house, not a better application.
The bottom line
Below 36 percent is a comfortable place to be. Above 43 percent, mortgage approval becomes uncertain and your budget has no room for surprise. If your DTI is higher than you would like, paying down revolving debt moves the number fastest, and it improves your credit score at the same time.