Your debt-to-income ratio and why lenders care. How to calculate front-end and back-end DTI, what percentage is ideal, and strategies to lower yours fast.

Debt-to-Income Ratio: What Lenders Really Look For

Your credit score isn't everything. You could have an 800 credit score and still get denied for a mortgage.

The missing piece? Your debt-to-income ratio (DTI).

Lenders want to know you can afford the new debt. DTI measures exactly that—how much of your income already goes to debt payments. Too high, and lenders see risk. Too low, and they're comfortable approving you.

Here's everything you need to know about DTI.

What Is Debt-to-Income Ratio?

The Definition

DTI is the percentage of your gross monthly income that goes toward monthly debt payments.

Formula: DTI = (Monthly Debt Payments ÷ Gross Monthly Income) × 100

Example:

Monthly debt payments: $2,000
Gross monthly income: $6,000
DTI: 2,000 ÷ 6,000 = 33.3%

Two Types of DTI

Front-end DTI (Housing Ratio): Only housing costs divided by income.

Mortgage/rent payment
Property taxes
Homeowners insurance
HOA fees (if applicable)

Back-end DTI (Total Ratio): All monthly debt payments divided by income.

Housing costs (above)
Car payments
Student loans
Credit card minimum payments
Personal loans
Child support/alimony

Lenders focus on back-end DTI for overall qualification, though front-end matters for mortgages.

What Counts as Debt?

Included in DTI

Debt Type	Counts?
Mortgage/rent	Yes
Car payments	Yes
Student loans	Yes
Credit card minimums	Yes
Personal loans	Yes
Child support/alimony	Yes
Other installment loans	Yes

Not Included in DTI

Expense	Counts?
Utilities	No
Groceries	No
Insurance (non-housing)	No
Cell phone	No
Subscriptions	No
Gas/transportation	No
Taxes (income/payroll)	No

Key distinction: DTI only counts debt obligations, not living expenses.

What's a Good DTI?

General Guidelines

DTI Range	Rating	Lender View
Under 20%	Excellent	Very comfortable
20-35%	Good	Comfortable
36-43%	Acceptable	Some concern
44-50%	High	Risky
Over 50%	Very High	Often disqualifying

Specific Loan Requirements

Conventional mortgage:

Front-end: Under 28% preferred
Back-end: Under 36% preferred
Maximum: Up to 50% with compensating factors

FHA mortgage:

Front-end: Under 31%
Back-end: Under 43% (up to 50% with compensating factors)

VA mortgage:

No strict front-end limit
Back-end: Generally under 41% (flexible with residual income)

Auto loans:

Prefer under 40-45%
Less strict than mortgages

Credit cards/personal loans:

Less formal requirements
Higher DTI may mean lower limits or higher rates

Calculating Your DTI

Step 1: List Monthly Debt Payments

Debt	Monthly Payment
Rent/mortgage	$___
Car payment 1	$___
Car payment 2	$___
Student loans	$___
Credit card minimums	$___
Personal loans	$___
Other debt	$___
Total	$___****

Step 2: Calculate Gross Monthly Income

If salaried: Annual salary ÷ 12 = Gross monthly income

If hourly: Hourly rate × Hours per week × 52 ÷ 12

If self-employed: Average monthly net income (typically from tax returns)

Multiple income sources: Add all gross income together

Step 3: Calculate DTI

Monthly debt payments ÷ Gross monthly income × 100 = DTI %

Example:

Monthly debts: $2,500
Gross income: $7,000
DTI: 2,500 ÷ 7,000 × 100 = 35.7%

How DTI Affects Loan Approval

Mortgage Approval

DTI is critical for mortgages. Most conventional lenders want:

Back-end DTI under 43%
Lower DTI = better rates and terms

High DTI consequences:

May need larger down payment
May pay higher interest rate
May need to buy less house
May be denied entirely

Auto Loan Approval

Auto lenders are more flexible but still consider DTI:

Prefer under 40-45%
Higher DTI may mean higher rate
May limit loan amount

Credit Card Approval

Credit card issuers consider DTI but don't publish thresholds:

High DTI may mean lower credit limits
May affect approval for premium cards
Less impact than for installment loans

Improving Your DTI

Strategy 1: Pay Down Debt

Most direct approach—reduce monthly obligations.

Priority order:

Pay off small debts (quick wins, eliminate payments)
Pay down credit cards (reduces minimum payments)
Extra payments on installment loans

Example:

Current car payment: $400/month (12 months left)
Pay off car: $4,800
DTI improvement: $400/month eliminated

Strategy 2: Increase Income

Higher income = lower DTI percentage.

Options:

Ask for raise
Take on side income
Change jobs for higher pay
Add household income (partner's income)

Example:

Current income: $5,000/month
Debts: $2,000/month
Current DTI: 40%
New income: $6,000/month
New DTI: 33.3%

Strategy 3: Avoid New Debt

Don't take on new debt before major applications.

Hold off on:

New car purchases
New credit cards
Personal loans
Large financed purchases

Strategy 4: Refinance to Lower Payments

Lower monthly payments = lower DTI.

Options:

Refinance auto to longer term (caution: more interest)
Refinance student loans
Refinance mortgage (if lowers payment)

Example:

Current car payment: $500/month (36 months)
Refinance: $350/month (60 months)
DTI reduction: $150/month in payments

Strategy 5: Pay Off Credit Cards Strategically

Credit card minimum payments count in DTI. Paying off cards eliminates those minimums.

Example:

Card balance: $5,000
Minimum payment: $150/month
Pay off card: DTI reduces by $150/month factor

DTI for Self-Employed

Calculating Self-Employed Income

Lenders typically use:

Average of last 2 years' tax returns
Net self-employment income (after deductions)

Challenge: Tax deductions that reduce taxable income also reduce qualifying income.

Example:

Gross business revenue: $200,000
Business expenses: $80,000
Net income on taxes: $120,000
Qualifying monthly income: $10,000

Improving DTI as Self-Employed

Options:

Show higher income on taxes (fewer deductions)
Provide additional documentation
Use bank statement loans (alternative qualification)
Build larger down payment

DTI and Major Purchases

Before Applying for Mortgage

Calculate your DTI including proposed mortgage:

Current debts + proposed mortgage payment ÷ income

Example:

Current debts: $1,000/month
Proposed mortgage: $2,000/month
Income: $8,000/month
Projected DTI: 3,000 ÷ 8,000 = 37.5%

Action: If projected DTI is too high, pay down debt or target smaller mortgage.

Before Buying a Car

Calculate DTI including car payment:

Current debts + proposed car payment ÷ income

If buying car before house: Recognize the car payment will count against mortgage qualification.

Common DTI Mistakes

Mistake 1: Using Net Income Instead of Gross

DTI uses gross (pre-tax) income, not take-home pay.

Wrong: $4,000 take-home pay Right: $5,500 gross pay

Mistake 2: Forgetting Debts

All debt payments count, including:

Co-signed loans
Debts not on credit report
Child support/alimony

Mistake 3: Taking on Debt Before Mortgage

Buying a car before a house affects your mortgage qualification.

Better: Wait until after mortgage closes to take on new debt.

Mistake 4: Ignoring the Impact

Assuming credit score is all that matters. DTI can disqualify you even with excellent credit.

DTI FAQ

Does DTI affect credit score?

No. DTI is not a factor in credit scores. However, high credit utilization (which affects score) often correlates with high DTI.

Do lenders calculate DTI automatically?

Yes. Lenders pull your credit report (showing debt payments) and verify income to calculate DTI.

What if my DTI is too high for a mortgage?

Options:

Pay down debt
Buy less expensive house
Add co-borrower with income
Wait and improve DTI
Consider non-QM loan products

Does rent count in DTI?

Current rent doesn't count in DTI for mortgage qualification (you won't be paying rent AND mortgage). But rent history may be considered for creditworthiness.

How does DTI differ from credit utilization?

Credit utilization = Credit card balances ÷ Credit limits (affects credit score) DTI = All debt payments ÷ Income (affects loan qualification)

Your DTI Action Plan

Calculate Your Current DTI

List all monthly debt payments
Determine gross monthly income
Calculate DTI percentage
Compare to lending standards

If DTI Is Too High

Identify debts that can be paid off
Create payoff plan
Explore income increase options
Avoid new debt

Before Major Applications

Calculate projected DTI including new loan
Pay down debt if needed
Document income properly
Time application after DTI improvement

Next Steps

DTI is the often-overlooked factor in loan approval. You can have perfect credit and still be denied if your income can't support more debt.

Calculate your DTI today. If it's above 40%, you have work to do before applying for major loans. Pay down debt, increase income, or both.

Lenders want to see you can afford what you're borrowing. DTI is how they measure that.

Need help optimizing your financial profile for lending? Freedom Consulting helps business owners prepare for funding. Book a free consultation to optimize your DTI.

Disclaimer: Lender requirements vary. DTI thresholds are guidelines, not guarantees. Consult with mortgage professionals for specific qualification requirements.

Continue Learning

This article is part of our Personal Credit Score: The Ultimate Guide to 800+ Credit guide series.

Related articles in this series:

Debt-to-Income Ratio: What Lenders Really Look For

Your credit score isn't everything. You could have an 800 credit score and still get denied for a mortgage.

The missing piece? Your debt-to-income ratio (DTI).

Here's everything you need to know about DTI.

What Is Debt-to-Income Ratio?

The Definition

DTI is the percentage of your gross monthly income that goes toward monthly debt payments.

Formula: DTI = (Monthly Debt Payments ÷ Gross Monthly Income) × 100

Example:

Monthly debt payments: $2,000
Gross monthly income: $6,000
DTI: 2,000 ÷ 6,000 = 33.3%

Two Types of DTI

Front-end DTI (Housing Ratio): Only housing costs divided by income.

Mortgage/rent payment
Property taxes
Homeowners insurance
HOA fees (if applicable)

Back-end DTI (Total Ratio): All monthly debt payments divided by income.

Housing costs (above)
Car payments
Student loans
Credit card minimum payments
Personal loans
Child support/alimony

Lenders focus on back-end DTI for overall qualification, though front-end matters for mortgages.

What Counts as Debt?

Included in DTI

Debt Type	Counts?
Mortgage/rent	Yes
Car payments	Yes
Student loans	Yes
Credit card minimums	Yes
Personal loans	Yes
Child support/alimony	Yes
Other installment loans	Yes

Not Included in DTI

Expense	Counts?
Utilities	No
Groceries	No
Insurance (non-housing)	No
Cell phone	No
Subscriptions	No
Gas/transportation	No
Taxes (income/payroll)	No

Key distinction: DTI only counts debt obligations, not living expenses.

What's a Good DTI?

General Guidelines

DTI Range	Rating	Lender View
Under 20%	Excellent	Very comfortable
20-35%	Good	Comfortable
36-43%	Acceptable	Some concern
44-50%	High	Risky
Over 50%	Very High	Often disqualifying

Specific Loan Requirements

Conventional mortgage:

Front-end: Under 28% preferred
Back-end: Under 36% preferred
Maximum: Up to 50% with compensating factors

FHA mortgage:

Front-end: Under 31%
Back-end: Under 43% (up to 50% with compensating factors)

VA mortgage:

No strict front-end limit
Back-end: Generally under 41% (flexible with residual income)

Auto loans:

Prefer under 40-45%
Less strict than mortgages

Credit cards/personal loans:

Less formal requirements
Higher DTI may mean lower limits or higher rates

Calculating Your DTI

Step 1: List Monthly Debt Payments

Debt	Monthly Payment
Rent/mortgage	$___
Car payment 1	$___
Car payment 2	$___
Student loans	$___
Credit card minimums	$___
Personal loans	$___
Other debt	$___
Total	$___****

Step 2: Calculate Gross Monthly Income

If salaried: Annual salary ÷ 12 = Gross monthly income

If hourly: Hourly rate × Hours per week × 52 ÷ 12

If self-employed: Average monthly net income (typically from tax returns)

Multiple income sources: Add all gross income together

Step 3: Calculate DTI

Monthly debt payments ÷ Gross monthly income × 100 = DTI %

Example:

Monthly debts: $2,500
Gross income: $7,000
DTI: 2,500 ÷ 7,000 × 100 = 35.7%

How DTI Affects Loan Approval

Mortgage Approval

DTI is critical for mortgages. Most conventional lenders want:

Back-end DTI under 43%
Lower DTI = better rates and terms

High DTI consequences:

May need larger down payment
May pay higher interest rate
May need to buy less house
May be denied entirely

Auto Loan Approval

Auto lenders are more flexible but still consider DTI:

Prefer under 40-45%
Higher DTI may mean higher rate
May limit loan amount

Credit Card Approval

Credit card issuers consider DTI but don't publish thresholds:

High DTI may mean lower credit limits
May affect approval for premium cards
Less impact than for installment loans

Improving Your DTI

Strategy 1: Pay Down Debt

Most direct approach—reduce monthly obligations.

Priority order:

Pay off small debts (quick wins, eliminate payments)
Pay down credit cards (reduces minimum payments)
Extra payments on installment loans

Example:

Current car payment: $400/month (12 months left)
Pay off car: $4,800
DTI improvement: $400/month eliminated

Strategy 2: Increase Income

Higher income = lower DTI percentage.

Options:

Ask for raise
Take on side income
Change jobs for higher pay
Add household income (partner's income)

Example:

Current income: $5,000/month
Debts: $2,000/month
Current DTI: 40%
New income: $6,000/month
New DTI: 33.3%

Strategy 3: Avoid New Debt

Don't take on new debt before major applications.

Hold off on:

New car purchases
New credit cards
Personal loans
Large financed purchases

Strategy 4: Refinance to Lower Payments

Lower monthly payments = lower DTI.

Options:

Refinance auto to longer term (caution: more interest)
Refinance student loans
Refinance mortgage (if lowers payment)

Example:

Current car payment: $500/month (36 months)
Refinance: $350/month (60 months)
DTI reduction: $150/month in payments

Strategy 5: Pay Off Credit Cards Strategically

Credit card minimum payments count in DTI. Paying off cards eliminates those minimums.

Example:

Card balance: $5,000
Minimum payment: $150/month
Pay off card: DTI reduces by $150/month factor

DTI for Self-Employed

Calculating Self-Employed Income

Lenders typically use:

Average of last 2 years' tax returns
Net self-employment income (after deductions)

Challenge: Tax deductions that reduce taxable income also reduce qualifying income.

Example:

Gross business revenue: $200,000
Business expenses: $80,000
Net income on taxes: $120,000
Qualifying monthly income: $10,000

Improving DTI as Self-Employed

Options:

Show higher income on taxes (fewer deductions)
Provide additional documentation
Use bank statement loans (alternative qualification)
Build larger down payment

DTI and Major Purchases

Before Applying for Mortgage

Calculate your DTI including proposed mortgage:

Current debts + proposed mortgage payment ÷ income

Example:

Current debts: $1,000/month
Proposed mortgage: $2,000/month
Income: $8,000/month
Projected DTI: 3,000 ÷ 8,000 = 37.5%

Action: If projected DTI is too high, pay down debt or target smaller mortgage.

Before Buying a Car

Calculate DTI including car payment:

Current debts + proposed car payment ÷ income

If buying car before house: Recognize the car payment will count against mortgage qualification.

Common DTI Mistakes

Mistake 1: Using Net Income Instead of Gross

DTI uses gross (pre-tax) income, not take-home pay.

Wrong: $4,000 take-home pay Right: $5,500 gross pay

Mistake 2: Forgetting Debts

All debt payments count, including:

Co-signed loans
Debts not on credit report
Child support/alimony

Mistake 3: Taking on Debt Before Mortgage

Buying a car before a house affects your mortgage qualification.

Better: Wait until after mortgage closes to take on new debt.

Mistake 4: Ignoring the Impact

Assuming credit score is all that matters. DTI can disqualify you even with excellent credit.

DTI FAQ

Does DTI affect credit score?

No. DTI is not a factor in credit scores. However, high credit utilization (which affects score) often correlates with high DTI.

Do lenders calculate DTI automatically?

Yes. Lenders pull your credit report (showing debt payments) and verify income to calculate DTI.

What if my DTI is too high for a mortgage?

Options:

Pay down debt
Buy less expensive house
Add co-borrower with income
Wait and improve DTI
Consider non-QM loan products

Does rent count in DTI?

Current rent doesn't count in DTI for mortgage qualification (you won't be paying rent AND mortgage). But rent history may be considered for creditworthiness.

How does DTI differ from credit utilization?

Credit utilization = Credit card balances ÷ Credit limits (affects credit score) DTI = All debt payments ÷ Income (affects loan qualification)

Your DTI Action Plan

Calculate Your Current DTI

List all monthly debt payments
Determine gross monthly income
Calculate DTI percentage
Compare to lending standards

If DTI Is Too High

Identify debts that can be paid off
Create payoff plan
Explore income increase options
Avoid new debt

Before Major Applications

Calculate projected DTI including new loan
Pay down debt if needed
Document income properly
Time application after DTI improvement

Next Steps

DTI is the often-overlooked factor in loan approval. You can have perfect credit and still be denied if your income can't support more debt.

Calculate your DTI today. If it's above 40%, you have work to do before applying for major loans. Pay down debt, increase income, or both.

Lenders want to see you can afford what you're borrowing. DTI is how they measure that.

Need help optimizing your financial profile for lending? Freedom Consulting helps business owners prepare for funding. Book a free consultation to optimize your DTI.

Disclaimer: Lender requirements vary. DTI thresholds are guidelines, not guarantees. Consult with mortgage professionals for specific qualification requirements.

Continue Learning

This article is part of our Personal Credit Score: The Ultimate Guide to 800+ Credit guide series.

Related articles in this series:

Debt-to-Income Ratio: What Lenders Really Look For

Debt-to-Income Ratio: What Lenders Really Look For

What Is Debt-to-Income Ratio?

The Definition

Two Types of DTI

What Counts as Debt?

Included in DTI

Not Included in DTI

What's a Good DTI?

General Guidelines

Specific Loan Requirements

Calculating Your DTI

Step 1: List Monthly Debt Payments

Step 2: Calculate Gross Monthly Income

Step 3: Calculate DTI

How DTI Affects Loan Approval

Mortgage Approval

Auto Loan Approval

Credit Card Approval

Improving Your DTI

Strategy 1: Pay Down Debt

Strategy 2: Increase Income

Strategy 3: Avoid New Debt

Strategy 4: Refinance to Lower Payments

Strategy 5: Pay Off Credit Cards Strategically

DTI for Self-Employed

Calculating Self-Employed Income

Improving DTI as Self-Employed

DTI and Major Purchases

Before Applying for Mortgage

Before Buying a Car

Common DTI Mistakes

Mistake 1: Using Net Income Instead of Gross

Mistake 2: Forgetting Debts

Mistake 3: Taking on Debt Before Mortgage

Mistake 4: Ignoring the Impact

DTI FAQ

Does DTI affect credit score?

Do lenders calculate DTI automatically?

What if my DTI is too high for a mortgage?

Does rent count in DTI?

How does DTI differ from credit utilization?

Your DTI Action Plan

Calculate Your Current DTI

If DTI Is Too High

Before Major Applications

Next Steps

Continue Learning

Need Help with Your Credit Strategy?

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Credit Utilization Explained: Why 30% is Not the Magic Number

Debt-to-Income Ratio: What Lenders Really Look For

Debt-to-Income Ratio: What Lenders Really Look For

What Is Debt-to-Income Ratio?

The Definition

Two Types of DTI

What Counts as Debt?

Included in DTI

Not Included in DTI

What's a Good DTI?

General Guidelines

Specific Loan Requirements

Calculating Your DTI

Step 1: List Monthly Debt Payments

Step 2: Calculate Gross Monthly Income

Step 3: Calculate DTI

How DTI Affects Loan Approval

Mortgage Approval

Auto Loan Approval

Credit Card Approval

Improving Your DTI

Strategy 1: Pay Down Debt

Strategy 2: Increase Income

Strategy 3: Avoid New Debt

Strategy 4: Refinance to Lower Payments

Strategy 5: Pay Off Credit Cards Strategically

DTI for Self-Employed

Calculating Self-Employed Income