If you've ever asked yourself “What is a good debt-to-income ratio to buy a house?” you’re in the right place. Understanding your Debt-to-Income Ratio (DTI) can be the key to unlocking your home-buying potential and sailing through the mortgage approval process. If you want to skip the details and quickly calculate your debt to income ratio to buy a house, check out our mortgage DTI calculator. Jump to the bottom of the article to learn how to lower your debt to income ratio.
Debt-to-Income Ratio To Buy a House - Calculator
In simple terms, your DTI is the percentage of your gross monthly income that goes toward paying your monthly debts. To calculate your DTI ratio, add up all of your monthly debt payments (credit card bills, car payments, student loans, etc) and divide that number by your gross monthly income. Your DTI ratio is a critical metric that lenders use to evaluate your ability to manage monthly payments and repay the borrowed money. If you’re calculating your DTI ratio to buy a house, use our free Mortgage Debt-to-Income Ratio Calculator - if you want personalized advice on how to lower your DTI ratio and identify savings, try our full service app with an affordable subscription.
Your DTI can broadly be divided into two components:
Front-end debt-to-income ratio (or housing ratio): These expenses typically include your potential mortgage payment, property taxes, homeowner's insurance, and possibly homeowner's association (HOA) fees. For instance, if your gross monthly income is $5,000 and your total housing-related expenses are $1,500, your front-end DTI ratio is 30% ($1,500 ÷ $5,000 = 0.30, or 30%)
Back-end debt-to-income ratio: The back-end or mortgage DTI ratio is a bit more comprehensive. This ratio considers all your monthly debt obligations along with your housing-related expenses. Debt obligations can include credit card bills, car loans, student loans, personal loans, and any other recurring debt payments. For example, if you have the same $5,000 gross monthly income, but in addition to the $1,500 in housing-related expenses, you have a $200 car loan payment and a $300 student loan payment, your back-end DTI ratio would be 40% ($2,000 total debt payments ÷ $5,000 = 0.40, or 40%).
The Role of Debt-to-Income Ratios in Mortgage Approval
The lower your DTI, the more attractive you are to lenders. A lower DTI indicates a healthy balance between debt and income. If your DTI ratio is 36% or below, you’re in great shape, however, many lenders are willing to accept higher ratios provided you have a stable income and a better credit score.
Debt to Income Ratio to Buy a House Calculator Let's illustrate this with an example. Say, you earn $5,000 a month. Your total debt payments, including a potential mortgage, would be $1,800, leading to a DTI of 36%. If your mortgage-related expenses amount to $1,000, your front-end ratio would be 20%. With these ratios, you are likely to be seen favorably by most lenders.
Improve Your DTI So, how can you improve your DTI and increase your home-buying power? Here are some effective strategies:
Lowering your monthly payments by refinancing and consolidating debt: There are many ways to manage debt, but it can be difficult to know which debt-products to use. If you have multiple high-interest debts, consolidating them into one lower-interest loan can reduce your monthly payments and improve your DTI. Need a place to get started? Try out our debt optimizer. Or check out our guide for tips for personalized debt management here.
Avoid taking on any new debt: If you're planning to buy a home, it might be wise to postpone that new car purchase or avoid opening a new credit card. Recent credit usage makes you less attractive to lenders by negatively impacting your credit score.
Increase your income: While this is not a quick fix, it is another way to improve your DTI ratio. If you’re up for a promotion in the near future or are able to generate stable income through other means, consider actions that will give you some extra cash flow.
Remember, your DTI is just one factor that lenders consider. Your credit score, job stability, and down payment size also play significant roles in the mortgage approval process. Take a holistic approach to improve your financial health, develop a plan with easy-to-use tools and calculators, and make your home-buying process easier than ever.