Find out your DTI ratio and whether lenders will approve you for a mortgage or loan.
Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward paying debts. Lenders use it as a primary factor in determining whether you can afford a new loan. It measures your ability to manage monthly payments and repay borrowed money.
35% or less: Excellent. You are managing debt well and lenders view you favorably. You likely qualify for the best rates and terms on new loans.
36-43%: Acceptable. Most conventional lenders will still approve you, though you may not get the best rates. This is the maximum range for most qualified mortgages.
44-49%: High. Mortgage approval becomes difficult. You may need compensating factors like a large down payment, significant cash reserves, or an excellent credit score.
50%+: Very high. Most lenders will not approve new loans. Focus on paying down existing debt before taking on more.
Lenders often look at two DTI numbers. Front-end DTI (also called the housing ratio) includes only housing costs (mortgage, taxes, insurance, HOA). The guideline is 28% or less. Back-end DTI includes all debts, with a guideline of 36% or less. This is the 28/36 rule used by most conventional lenders.
You can improve your DTI by increasing income (raises, side income, second job) or decreasing debt payments (pay off smaller debts, refinance to lower rates, extend loan terms). Paying off a credit card with a $200/month minimum reduces your DTI by $200/income. On a $6,000/month income, that is a 3.3% DTI improvement.