Buying a home is an exciting step, but if you need a mortgage, getting your finances in order — especially your debt-to-income (DTI) ratio — is crucial. Your DTI ratio is the percentage of your gross monthly income that goes toward paying your debts. It’s one of the main ways lenders evaluate your ability to manage monthly mortgage payments.
Why Your Debt-to-Income Ratio Matters According to the 2024 Profile of Homebuyers and Sellers report by the National Association of Realtors (NAR), a high DTI ratio was the number one reason mortgage applications were denied, accounting for 40% of denials. Other common reasons included low credit scores (23%), unverifiable income (12%), and insufficient reserves (12%).
Lenders typically look for a DTI ratio of 35% or less to feel confident you can handle additional mortgage payments. Some may approve borrowers with a DTI as high as 45% or even 50%, but that depends on the loan program and other factors.
How to Calculate Your Debt-to-Income Ratio To figure out your DTI ratio:
- Add up all your monthly debt payments (e.g., student loans, car loans, credit cards).
- Divide that total by your gross monthly income.
- Multiply the result by 100 to get your percentage.
For example, if you make $6,000 a month and have $500 in monthly debt payments:
- $500 ÷ $6,000 = 0.083
- 0.083 × 100 = 8.3% DTI
The 28/36 Rule A helpful guideline to determine a manageable mortgage payment is the 28/36 rule:
- Spend no more than 28% of your gross monthly income on housing expenses (mortgage, taxes, insurance).
- Keep total debt — including your new mortgage — under 36% of your gross monthly income.
For example, if your gross income is $6,000 a month:
- 28% of $6,000 = $1,680 (maximum recommended monthly housing cost)
- 36% of $6,000 = $2,160 (maximum total debt payments)
Strategies to Improve Your Debt-to-Income Ratio If your DTI ratio is too high, you have two main ways to improve it: reducing debt or increasing income.
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Reduce Debt
- Snowball Method: Pay off smaller debts first for quick wins and motivation.
- Avalanche Method: Pay off debts with the highest interest rates first to save money long-term.
- Focus on high-interest debt like credit cards to free up cash flow faster.
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Increase Income
- Consider side gigs or freelance work.
- Ask for a raise or seek a higher-paying job.
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Avoid New Debt
- Hold off on major purchases that require financing, like cars or furniture, until after you secure your mortgage.
Final Thoughts A healthy debt-to-income ratio is key to securing a mortgage and affording your dream home comfortably. By reducing debt, increasing income, and keeping new expenses low, you’ll improve your financial standing and boost your chances of mortgage approval.
If you need guidance navigating the mortgage process, feel free to reach out — I’m here to help you make the best financial decisions for your future home!