DTI Ratio Explained

Your debt to income ratio decides your mortgage size more directly than your credit score does. Here is how lenders calculate it.

The two ratios

• Front-end: housing costs divided by gross monthly income, with a target under 28%
• Back-end: every debt payment divided by gross monthly income, with a target under 43%
• Housing costs mean PITIA: principal, interest, taxes, insurance and association dues
• Other debts include car payments, student loans, credit card minimums and child support
• FHA allows up to 57% on the back end with compensating factors
• VA sets no formal cap and uses a residual income test, though most lenders stop around 60%
• Conventional generally caps at 50% with strong compensating factors

In Florida, insurance is the letter that breaks the ratio

Notice that the I in PITIA is insurance, and that it sits inside the housing figure alongside principal and interest. In most states that line is small enough to ignore. Here it is not.

Take a buyer earning $8,000 a month, which allows roughly $3,440 of total debt at 43%. A homeowners and windstorm premium of $600 a month rather than $200 consumes $400 of that allowance directly. At current rates $400 of payment supports somewhere around $60,000 of additional loan, so the same buyer looking at a coastal property may qualify for meaningfully less house than they would inland.

Therefore quote the insurance before you fix your budget. Buyers who assume a national average premium routinely discover the shortfall after they are under contract, when the options are worse. See hurricane insurance and your mortgage for how to reduce it.

Student loans get counted differently by program

This trips up more applicants than any other line, and the treatment is not consistent.

Conventional lenders will generally use your actual income-driven repayment amount, even where that is small. FHA takes a different approach when the documented payment is zero, imputing a percentage of the outstanding balance instead. Consequently a borrower carrying $90,000 of deferred student debt can be assigned a monthly obligation of several hundred dollars they do not actually pay.

Because that single difference can decide the file, ask your loan officer to run both. A borrower declined on FHA sometimes qualifies conventionally purely on the student loan treatment.

Improving the ratio

• Pay off small balances entirely rather than reducing large ones, since the ratio counts the monthly payment and not the balance
• Avoid financing a car in the six months before you apply, as a new payment can cost you more borrowing power than the car is worth
• Document all income, including bonus, overtime and rental income with the history a lender needs
• Consider a longer term, since a 30-year payment is lower than a 15-year one
• If you are self-employed, ask about add-backs, which often raise qualifying income above your tax return figure

Want to see the effect on a purchase price? Read how much house you can afford.

Figures above are illustrative. Ratio caps and student loan treatment follow agency, FHA and VA guidelines, which lenders apply with their own overlays. The CFPB owning a home guide explains how lenders assess affordability.