Woman reviewing personal finances with laptop and calculator

How to calculate a debt-to-income ratio for a mortgage

Buying a home is sure to be one of the most significant purchases you and your family will ever make. That’s exactly why it’s essential to know if you’re financially ready. There are many different factors mortgage lenders use to measure how much house you can afford. Along with your credit score and job stability, your debt-to-income ratio, or DTI, is a key indicator of your financial health.1 Explore these eight frequently asked questions to find out how to calculate your debt-to-income ratio, what makes a good DTI and ways to improve it.

  • 1. What is a debt-to-income ratio?

    DTI is the percentage of your gross monthly income that goes towards your monthly debt payments is your debt-to-income ratio.

  • 2. Why does my DTI matter when I’m applying for a mortgage loan?

    Your debt-to-income ratio is important because it reflects your ability to manage monthly mortgage payments and repay debts.

  • 3. What monthly payments make up my debt?

    Monthly debt payments include auto loans, student loans, mortgages, personal loans, credit lines, child support, alimony, and the minimum payment amounts of your credit cards. Household utility bills, as well as car and health insurance, are not considered debt.2

  • 4. What’s included in my gross monthly income?

    Your gross monthly income includes everything you earn before taxes, from wages to salary and other forms of income before taxes. For example, paychecks, freelance income, rent from rental property and investment income.3

  • 5. How do I calculate my debt-to-income ratio?

    Divide your monthly debt by your gross monthly income, and then multiply by 100. Alternatively, plug in your total monthly debt and total monthly income into the Guild Pre-qualification Mortgage Calculator to automatically calculate your debt-to-income ratio.

  • 6. What is a good debt-to-income ratio?

    Having a DTI ratio of 36% or less is considered ideal.4 “That means you have a manageable debt load and money left over after making your monthly debt payments,” states the balance.5 However, that doesn’t mean you won’t qualify for a mortgage loan with a higher debt-to-income ratio.

  • 7. How much debt is acceptable to qualify for a mortgage loan?

    The maximum percentage of debt varies by the type of loan and the lender. Here are examples of DTI limits for three different loan programs:

    • If you’re looking to get an FHA mortgage loan, the maximum DTI is 43% for most borrowers. However, a higher debt-to-income ratio of 50% might be allowed in some cases if you have a credit score of 580 or above, and meet certain acceptable compensating factors, such as verified and documented cash reserves or residual income, you may still be able to get a mortgage. 6
    • Fannie Mae and Freddie Mac now allow DTI limits of up to 50% for conforming loans.
    • The acceptable debt-to-income ratio for a VA loan is 41%.7

  • 8. How can I improve my DTI before I buy a home?

    There are two main ways to reduce your debt-to-income ratio. The first is to increase your income by renegotiating your salary, taking a part-time job, or improving your skills.8 The second way is to pay down your debt. “But that strategy may have an unintended impact on your credit score,” advises U.S. News and World Report.9 Consider meeting with a financial advisor or mortgage loan expert for guidance before making any financial decisions.

Now that you understand what your debt-to-income ratio is and why it’s important, here’s a step-by-step first-time homebuyer guide to help you navigate through the process of buying a home and securing a loan.

The above information is for educational purposes only. All information, loan programs & interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply.

1 Understanding Debt-to-Income Ratio for a Mortgage – Nerdwallet

2 Your credit score isn’t the only number lenders use to decide if you’re trustworthy – Business Insider

3 How To Calculate DTI, Your Debt-To-Income Ratio ― And Why You Should – Huffington Post

4 Lower Your Debt-to-Income Ratio – the balance

5 Lower Your Debt-to-Income Ratio – the balance

6 How Much Debt Can I Have and Still Get a Mortgage Loan? – Home Buying Institute

7 Debt-To-Income Ratio: Does it Make Any Difference to VA Loans? – US Department of Veterans Affairs

8 How To Calculate DTI, Your Debt-To-Income Ratio ― And Why You Should – Huffington Post

9 What Is My Debt-to-Income Ratio? – US News and World Report

By |Published On: October 28th, 2019|Categories: Mortgage 101, Products and Programs|

Share this story, choose your platform!

About the Author: Guild Mortgage

Founded in 1960 when the modern U.S. mortgage industry was just forming, Guild Mortgage Company is a nationally recognized independent mortgage lender providing residential mortgage products and local in-house origination and servicing. Guild’s collaborative culture and commitment to diversity and inclusion enable it to deliver a personalized experience for each customer. With more than 4,000 employees and over 250 retail branches, Guild has relationships with credit unions, community banks, and other financial institutions and services loans in 49 states and the District of Columbia. Guild’s highly trained loan professionals are experienced in government-sponsored programs such as FHA, VA, USDA, down payment assistance programs and other specialized loan programs. Guild Mortgage Company is a wholly owned subsidiary of Guild Holdings Company, whose shares of Class A common stock trade on the New York Stock Exchange under the symbol GHLD.