Debt-to-Income Ratio (DTI)
The debt-to-income (DTI) ratio is your monthly debt payments divided by your gross monthly income, expressed as a percentage. Most lenders require a DTI below 43% to qualify for a mortgage.
$2,000 monthly debts on $7,000 gross income = 28.6% DTI.
DTI has two forms: front-end DTI (housing costs ÷ gross income) and back-end DTI (all debt payments ÷ gross income). The 28/36 rule says front-end should be ≤28% and back-end ≤36%.
To calculate: add up all monthly minimum debt payments (mortgage/rent, car loans, student loans, credit card minimums) and divide by gross monthly income (before tax). A $5,000/month income with $1,800 in debts = 36% DTI.
A lower DTI means better loan terms and a higher chance of approval. Paying down existing debts before applying for a mortgage can significantly improve your DTI.
Put this into practice with our free calculator:
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- Mortgage Payment
- A mortgage payment is the fixed monthly amount owed to a lender, covering principal and interest (P&I). It may also include escrow for property tax and homeowners insurance (PITI).
- Loan-to-Value Ratio (LTV)
- The loan-to-value (LTV) ratio is the mortgage amount divided by the property's appraised value, expressed as a percentage. An LTV above 80% typically requires private mortgage insurance (PMI) in the US.
- Gross Income
- Gross income is your total income before any taxes, deductions, or withholdings. It is the starting figure used by lenders for DTI calculations and by tax authorities to determine your tax bracket.