When you apply for a mortgage, the lender looks at three things first: your credit, your down payment and your debt-to-income ratio, or DTI. DTI is the one you can calculate exactly at home, and it decides how big a monthly payment, and therefore how expensive a home, a lender will approve. Here is how lenders calculate it, which debts count, the limits for each loan type and how to work backward to your maximum payment.
What DTI is and why lenders use it
Your debt-to-income ratio is the share of your gross monthly income, before taxes and deductions, that goes to required debt payments. A DTI of 40% means that $40 of every $100 you earn is already committed to debts, including the new mortgage. Lenders use it as a simple measure of whether you can carry the new payment without strain. Lower DTI means more room in your budget and, often, better pricing.
The two DTI formulas
Mortgage lenders calculate two ratios:
- Front-end DTI (housing ratio) = monthly housing payment ÷ gross monthly income. The housing payment includes principal, interest, property tax, homeowners insurance, mortgage insurance and HOA dues, often abbreviated as PITI or PITIA.
- Back-end DTI (total ratio) = (housing payment + all other monthly debt payments) ÷ gross monthly income.
The back-end ratio is the one most lenders treat as the main limit. When people talk about "your DTI" without saying which, they almost always mean the back-end ratio.
Worked example
Alex earns $90,000 a year, so gross monthly income is $90,000 ÷ 12 = $7,500. Current debts from the credit report:
| Debt | Monthly payment |
|---|---|
| Car loan | $450 |
| Student loan | $300 |
| Credit card (minimum payment) | $100 |
| Total other debts | $850 |
The home Alex wants would have a housing payment of $2,000 a month: principal and interest of $1,550, property tax of $300 and insurance of $150.
- Front-end DTI = $2,000 ÷ $7,500 = 26.7%
- Back-end DTI = ($2,000 + $850) ÷ $7,500 = $2,850 ÷ $7,500 = 38.0%
At 38%, Alex is comfortably inside the limits for a conventional loan approved through automated underwriting and for an FHA loan, though slightly above the 36% that conventional guidelines set for manually underwritten loans. To run the same numbers with your own income and debts, use the mortgage pre-approval calculator.
What counts as debt (and what does not)
Lenders count recurring obligations that appear on your credit report or in court orders, not your everyday spending.
Counted
- The new housing payment (PITI plus HOA dues).
- Auto loans and leases, personal loans and student loans.
- Minimum payments on credit cards and other revolving accounts, even if you pay the full balance every month. If the report shows no minimum, lenders often use a percentage of the balance, commonly 5%.
- Child support and alimony.
- Payments on other properties you own, and co-signed loans.
Usually not counted
- Utilities, phone and internet, groceries, car insurance and other living costs.
- Income taxes and retirement contributions withheld from your paycheck.
- Installment debts with ten or fewer payments left, under Fannie Mae rules, unless the payment is large enough to affect your ability to pay.
Student loans in deferment or with a $0 payment
This trips up many borrowers. FHA loans use 0.5% of the outstanding balance as the monthly payment when the reported payment is zero. Conventional loans use the actual income-driven payment if it is documented, or otherwise 1% of the balance or the fully amortizing payment. On a $40,000 student loan, that can mean $200 to $400 a month counted against you even if you are currently paying nothing. If you are on an income-driven plan, the RAP student loan calculator shows what your documented payment would be.
Which income counts
The bottom of the fraction matters as much as the top. Lenders count income that is stable and likely to continue:
- Salary and hourly wages at the current gross rate, verified with pay stubs and W-2s. For hourly workers with changing hours, lenders often average the last two years.
- Overtime, bonuses and commission usually need a two-year history and are averaged. If they are declining, the lender may use the lower recent figure.
- Self-employment income is taken from tax returns, typically a two-year average of net profit after business expenses, not gross revenue. Large write-offs lower taxable income and therefore raise your DTI.
- Rental income is generally counted at about 75% of the lease rent to allow for vacancies and maintenance.
- Social Security, pensions and disability income count if they will continue for at least three years. Non-taxable income can often be grossed up, which lowers the ratio.
If your income is irregular, calculate DTI with the conservative two-year average, not your best recent month, so the lender's number does not surprise you.
DTI limits by loan type
| Loan type | Guideline | How far it can stretch |
|---|---|---|
| Conventional (Fannie Mae / Freddie Mac) | 36% back-end for manual underwriting | Up to 45% manually with strong credit and reserves; up to 50% through automated underwriting |
| FHA | 31% front-end / 43% back-end | Automated approvals often go higher with compensating factors |
| VA | 41% back-end | Can be exceeded if residual income is strong |
| USDA | 29% front-end / 41% back-end | Exceptions possible with compensating factors |
Two caveats. First, these are program limits; individual lenders can set stricter overlays. Second, the old rule that a "qualified mortgage" could not exceed 43% DTI was replaced in 2021 by a test based on the loan's pricing, so 43% is no longer a hard legal ceiling, although many lenders still treat it as a comfortable target. A classic budgeting rule of thumb is 28/36: no more than 28% of gross income on housing and 36% on all debts.
Working backward: your maximum payment
The same formula tells you the largest housing payment a lender will accept:
Maximum housing payment = gross monthly income × DTI limit − other monthly debts
For Alex, with $7,500 of income and $850 of other debts:
- At a 36% limit: $7,500 × 0.36 − $850 = $1,850
- At a 43% limit: $7,500 × 0.43 − $850 = $2,375
- At a 50% limit: $7,500 × 0.50 − $850 = $2,900
Subtract estimated property tax, insurance and any HOA dues to get the principal-and-interest part, then turn that into a loan amount. At 6.5% for 30 years, every $1,000 of monthly principal and interest supports roughly $158,000 of loan. The loan calculator lets you test exact amounts and see the full amortization schedule. Remember that the maximum a lender approves is not the same as what is comfortable: DTI is based on gross income and ignores childcare, savings goals and other real costs.
How to lower your DTI before applying
- Pay off small installment debts. Eliminating a $350 car payment lowers Alex's back-end DTI by almost 5 points. Getting a loan to ten or fewer remaining payments can also help under conventional rules.
- Pay down credit card balances. A lower balance usually means a lower required minimum. To see how long a balance lasts on minimums, try the credit card minimum payment calculator.
- Consolidate at a lower payment. Rolling several debts into one longer loan can cut the total monthly payment, though it may cost more interest over time. Compare both sides with the debt consolidation loan calculator.
- Avoid new debt. Do not finance a car or furniture between pre-approval and closing; lenders re-check credit before funding.
- Add documented income. A co-borrower's income, or a two-year history of bonus, overtime or side income, can be counted.
- Choose a cheaper home or a larger down payment. Both lower the housing payment directly.
Enter your income, debts, rate and down payment to see your DTI and the home price you could qualify for.
Open the mortgage pre-approval calculator →FAQ
Is DTI calculated on gross or net income?
On gross income, before taxes and deductions. Using take-home pay would make your DTI look higher than the lender's number.
What is a good debt-to-income ratio for a mortgage?
Below 36% back-end is strong for any loan type. Between 36% and 43% is common and widely approved. Above 43% is possible, especially with automated underwriting, good credit and cash reserves, but approval and pricing get harder.
Does my credit card balance count if I pay it in full?
Yes. Lenders use the minimum payment shown on your credit report, regardless of whether you pay more. Paying the balance down before your statement closes reduces the reported minimum.
Is rent included in DTI?
Your current rent is not counted once you buy, because the new mortgage payment replaces it. If you will keep paying rent elsewhere, for example on a property you lease out, tell the lender.
Do utilities and car insurance count?
No. DTI includes debt payments and the full housing payment, but not utilities, car insurance, phone bills or other living costs.
What DTI do I need for an FHA loan?
The FHA guideline is 31% for housing and 43% in total, but automated underwriting often approves higher ratios when the file has compensating factors such as reserves or a strong payment history.