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Your Debt-to-Income Ratio and Why It Matters

June 1, 2021
First time home buyers hugging

Understanding the impact of your debt-to-income ratio and how to calculate it will help you set a budget for buying a home.

If you’re a newcomer to the housing market, you might not be sure what it takes to qualify for a mortgage. You may suspect your credit history and down payment are factors, and you’d be correct. But did you know about another important factor: your debt-to-income ratio?

What Is a Debt-to-Income Ratio?

Your debt-to-income ratio helps indicate to lenders whether you’re able to afford a mortgage. That’s because your DTI acts as a snapshot of how much of your income goes toward paying off debt each month. The lower your debt-to-income ratio, the easier it is to qualify for a home loan. Most lenders will not approve a mortgage for someone with a DTI above 43%. And in general, lenders prefer to see debt-to-income ratios of 36% or less. That’s because if a significant amount of your income is dedicated to paying off debt, you could quickly become delinquent on payments if you faced a loss of income or experienced a sudden unexpected expense.

How to Calculate Your Debt-to-Income Ratio

To calculate your DTI, simply divide your total monthly debt by your pretax income. Be sure to include all your monthly debt obligations. This should include items such auto loans, student loans, personal loans, minimum credit card payments, child support, alimony, or your potential future mortgage debt.*

*This is not an exhaustive list, some debt may or may not be excluded in calculations. Speak with your mortgage originator for specifics on your financial situation.

Here are a couple real-world examples of debt-to-income ratios:

Monthly Deb Obligations Monthly Income DTI
$1,650 $5,000 33%
$2,700 6,000 45%

Notice how in the second example, the person’s income is higher, but their DTI may make them less likely to be approved for a mortgage.

How to Lower Your Debt-to-Income Ratio

If your debt-to-income ratio is currently too high to afford a mortgage, there are steps you can take to help lower it:

  • Reduce your current debt by making additional payments on the principal amount, if possible.
  • Refinance or consolidate loans to lower the monthly payments.
  • Negotiate a pay raise at work.
  • Get a side job to supplement your income.*

*All income may not qualify, be sure to speak with your loan originator about what income will be eligible for your mortgage.

Determine Your Budget

Your debt-to-income ratio may help inform lenders about whether you can afford a mortgage, but it won’t directly tell you the mortgage amount you can afford. Figure out the specifics of how much home you can afford with this online calculator.

This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.