Most people know that you need to have a decent credit score to get a home loan. But fewer realize how important your debt-to-income (DTI) ratio is to buying your dream home. Here, you’ll learn the vital details about how much debt-to-income you can have to buy a home. If you have questions or want to apply, our home loan experts have you covered!
Debt-to-Income Ratio Requirements for a Mortgage
Your debt-to-income ratio is a percentage and reflects how much of your gross monthly income is used to service debt. Mortgage, car loans, student loans, personal loans, and credit card loans are the most common expenses that are used to measure DTI.
Your DTI is important to the lender because they want to ensure that you can make your mortgage payment every month. Having a good credit score and high earnings are important, but if you have too much debt, even making $500,000 a year may be insufficient to keep the mortgage paid.
The types of DTI that lenders base their lending decisions are:
- Front-end ratio: This shows how much of your income would be used to pay house expenses. It includes your mortgage, insurance, taxes, and HOA premiums, if appropriate.
- Back-end ratio: This number show how much of your gross monthly income is used to cover all debt payments, including housing, car payments, student loans, credit cards, etc.
How Much DTI Can You Have and Still Get a Mortgage?
Conventional lenders usually focus on the back-end ratio, which is all of your debts compared to your monthly income. Most conventional lenders will allow you to have a DTI of up to 45%. But certain lenders may allow you to have a 50% DTI if you have large savings with at least six months of housing expenses.
However, it is better to have a lower DTI if you can. Lenders will more easily approve you for a mortgage if you have less debt compared to more. Many lenders want you to have a front-end ratio that is no higher than 28%. The back-end ratio should be no more than 36%. Then, they will look at how much home you can afford after determining these ratios.
Having a lower DTI makes it simpler to be approved. Also, you can get a better rate and save on interest payments.
While standards and guidelines fluctuate, many lenders prefer a DTI below 35─36%. However, some mortgage lenders permit DTIs up to 43─45%, and certain FHA-insured loans even accommodate a 50% DTI. To understand the conventional debt-to-income standards better, explore the significance of your debt-to-income ratio before applying to buy a home in 2024.
Determining Your DTI
You can easily figure out your DTI before you apply for a mortgage:
- Add up all of your monthly debts: This will include your house payments, rent, personal loans, car loans, credit cards, student loans, and alimony or child support. If you are applying with your spouse, you should add up all of your expenses.
- Divide all debts by the gross monthly income: Make sure you divide all of your monthly debt payments by your pre-tax, gross monthly income.
- Convert that number into a percentage: Change the number to a percentage by multiplying it times 100.
For example, say your gross income per month is $6,000. Your rent is $1,800 and you have a $500 for an auto loan, and pay $150 for your student loan and $200 for your Visa card. That is a total debt service of $850 per month. For your front-end ratio, divide 850 by your rent of $1,800. You would get a 30% front-end ratio.
For your back-end ratio, add up all monthly debt payments, which is $2,650 in this example. Divide that number by $6,000 and you get a 44% back-end DTI.
DTI Requirements for Major Mortgage Types
We have covered what a ‘good’ DTI generally is, but different loan types and lenders have varying standards. Some loan types and lenders are more lenient than others:
- Conventional mortgages: Most lenders want to see a 28% front-end ratio and a 36% back-end ratio. But you could qualify with 45% to 50%, depending on your other qualifications.
- FHA mortgages: 31% is common for front-end ratios and 43% for back-end ratios. But 57% is possible for certain borrowers.
- VA mortgages: There are no set DTI limits for VA borrowers, but 41% is advised for the back-end ratio.
- USDA mortgages: 29% is common for front-end mortgages. 41% is common for back-end, but 44% is possible with limited exceptions.
How Can You Reduce Your DTI?
If you want to get a mortgage but are worried about your DTI, there are things you can do to reduce it. Also, remember that having a lower DTI will make it easier to keep the mortgage paid, whether it is a bar to being approved or not:
- Pay off your debts: If you can, lower your amount of debt by paying off credit cards and other loans. At least reduce them several months before applying for a home loan.
- Refinance current loans: See if you can reduce the interest rate on your debts. For instance, maybe you can qualify for a lower rate on your credit card debt by transferring a balance.
- Pay off your high-interest loans first: If you cannot refinance, focus on paying off the most expensive loans first. For instance, pay off the $5,000 credit card with a 15% rate instead of paying down the car loan with a 5% rate.
- Use a co-signer: If someone you know has good credit and income, you can ask them to co-sign the home loan.
Summary on DTI Requirements for Home Buying
Now you know the DTI you may need to qualify for a mortgage. However, the best way to be sure is to speak with a loan advisor today. They can tell you the mortgages you can qualify for with your current credit and debt-to-income ratios.
A reduced debt-to-income ratio signals to mortgage lenders that you maintain a favorable equilibrium between your debt obligations and income. Conversely, a higher debt-to-income ratio signifies that a significant portion of your earnings is allocated towards debt repayment, potentially portraying you as a higher-risk borrower to some lenders. Although the debt-to-income ratio isn’t the sole criterion for determining borrowing capacity, comprehending its implications is vital as you embark on the home loan journey.
Your debt-to-income ratio provides mortgage lenders and banks with insight into your overall financial situation, revealing the proportion of debt you carry compared to your monthly income. This metric enables mortgage lenders to evaluate your capacity to manage a monthly mortgage payment alongside any other outstanding debts.
About Dusty
Dusty Brazil is a licensed California real estate agent CA BRE #01780273 and proud to call himself a Realtor with Pacific Sotheby’s International Realty in Del Mar, CA. He's a native to Southern California and local in North County San Diego for over 25 years. You can learn more about him at Twitter, Linkedin, RealtyTimes, and Youtube.
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