Debt-to-Income Ratio: What It Is and How to Improve It

Your debt-to-income ratio (DTI) is one of the most important numbers in your financial life. It determines whether you qualify for loans and at what rates.

What Is Debt-to-Income Ratio?

DTI measures how much of your gross monthly income goes toward debt payments.

Formula: DTI = (Total Monthly Debt Payments / Gross Monthly Income) × 100

Example:

• Monthly debts: $2,500
• Gross income: $7,500
• DTI: 33%

Two Types of DTI

Front-End DTI (Housing Ratio)

Only housing costs: mortgage principal, interest, taxes, insurance (PITI).

• Ideal: Under 28%
• Maximum for most loans: 31%

Back-End DTI (Total Ratio)

All debt payments: housing + car loans + student loans + credit cards + other.

• Ideal: Under 36%
• Maximum for conventional: 43-45%
• Maximum for FHA: 50-57%

What Counts as "Debt"?

Included in DTI:

• Mortgage/rent
• Car payments
• Student loans
• Credit card minimum payments
• Personal loans
• Child support/alimony
• Other loan obligations

NOT Included:

• Utilities
• Insurance (except homeowners)
• Phone bills
• Groceries
• Subscriptions
• Medical bills (usually)
• Taxes

DTI Thresholds by Loan Type

Why DTI Matters

Loan Approval

Lenders use DTI as primary approval criteria. Too high = denied.

Interest Rates

Lower DTI often qualifies for better rates. A 30% DTI might get 0.25% better rate than 43%.

Loan Amount

High DTI limits how much you can borrow.

Financial Health Indicator

DTI above 50% suggests you may be overextended.

How to Calculate Your DTI

Step 1: Add Monthly Debt Payments

Mortgage/Rent:      $1,800
Car payment:        $450
Student loans:      $350
Credit card minimums: $150
---
Total:              $2,750

Step 2: Calculate Gross Monthly Income

Annual salary: $90,000
Monthly gross: $90,000 / 12 = $7,500

Step 3: Calculate DTI

$2,750 / $7,500 = 0.367 = 36.7% DTI

Strategies to Lower Your DTI

1. Pay Down Debt

Focus on high-payment balances first.

• Pay off car loan: Removes $450/month from DTI
• Pay off credit cards: Removes minimum payments

2. Increase Income

More income = lower DTI percentage.

• Negotiate raise
• Take on side work
• Add second income

3. Refinance Existing Debt

Lower payments = lower DTI.

• Refinance car at lower rate
• Extend loan terms (careful: more interest)
• Consolidate credit card debt

4. Avoid New Debt

Don't take on new loans before applying for mortgage/HELOC.

5. Pay More Than Minimums

Paying extra doesn't change minimum payment (for DTI), but paying off balances does.

6. Use HELOC to Consolidate

Convert multiple high-payment debts into one lower payment.

Example:

• Credit cards: $500/month minimums
• HELOC consolidation: $300/month interest-only
• DTI improvement: $200/month

Learn more about HELOC debt consolidation →

DTI vs Credit Score

Both matter, but differently:

You can have excellent credit (780) but high DTI (50%) and still be denied.

Common DTI Scenarios

"Good" Situation

• DTI: 32%
• Outcome: Qualifies for best rates, maximum loan amounts

"Borderline" Situation

• DTI: 44%
• Outcome: May qualify for conventional, definitely FHA. Rates may be higher.

"Challenging" Situation

• DTI: 52%
• Outcome: FHA may still work with strong compensating factors. Conventional unlikely.

"Difficult" Situation

• DTI: 60%+
• Outcome: Likely need to pay down debt before qualifying.

Compensating Factors

If your DTI is borderline, these can help:

• Large cash reserves (6+ months)
• Excellent credit score (740+)
• Significant down payment (20%+)
• Stable employment history
• Low loan-to-value ratio

DTI for Self-Employed

Lenders use your tax returns, not gross business revenue.

Challenge: Business deductions lower taxable income, raising DTI.

Example:

• Business revenue: $200,000
• After deductions: $100,000
• DTI calculated on $100,000/12 = $8,333/month

Solutions:

• Consider DSCR loans (no DTI calculation)
• Time major deductions strategically
• Maintain 2 years of consistent/rising income

Pre-Application Checklist

Before applying for a mortgage or HELOC:

1. ☐ Calculate your current DTI
2. ☐ Identify which debts could be paid off
3. ☐ Avoid new credit applications
4. ☐ Don't make large purchases
5. ☐ Keep employment stable
6. ☐ Document all income sources

The Bottom Line

DTI is a critical but often overlooked number. Knowing yours—and improving it—can mean the difference between loan approval and denial.

Target: Get below 36% for best options. Under 28% housing ratio is ideal.

Check Your Options

Want to see what you might qualify for? Start your pre-qualification to get a personalized assessment.