Debt-to-Income Ratio: How to Calculate and What’s Good

A mortgage lender’s yes-or-no decision often comes down to one number: your debt-to-income ratio. This guide explains how DTI is calculated, what lenders consider healthy, and how you can improve your ratio.

Median DTI for U.S. homeowners: 36% | Maximum DTI for conventional mortgage: 43% | Lenders consider “good” DTI: 36% or below | Percent of income spent on debt in average U.S. household: 23%

What is a good debt-to-income ratio?

Lenders generally classify a DTI of 36% or lower as “good.” This threshold signals to lenders that you have a manageable level of debt relative to your income. According to Chase mortgage guidelines, a DTI above 36% does not automatically disqualify a borrower, but it does require compensating factors like a higher credit score or larger down payment.

“Your debt-to-income ratio is a simple but crucial number that lenders use to evaluate your ability to manage monthly payments.” — Consumer Financial Protection Bureau

What lenders consider good

The consensus among major banks and federal agencies is that a DTI of 36% or less is healthy. The FDIC lending guidelines state that lenders usually require housing expenses to be less than or equal to 25% to 28% of monthly gross income, and housing expenses plus long-term debt to be less than or equal to 33% to 36% of monthly gross income. New York Life classifies under 35% as good, 36% to 41% as okay, 42% to 49% as concerning, and 50% or higher as needing improvement.

How good DTI differs by loan type

Different loan programs have varying DTI requirements. Cornell Legal Information Institute notes the traditional 28% housing and 36% overall debt thresholds, while qualified mortgages can go as high as 43% DTI. Experian says conventional loan guidelines by Fannie Mae and Freddie Mac can allow back-end DTIs as high as 50% in some circumstances.

The implication: borrowers with a DTI below 36% have the widest range of loan options and the strongest negotiating power for interest rates.

What is the formula for debt-to-income ratio?

The formula for calculating your DTI is straightforward, but getting the numbers right matters. The CFPB official definition states that gross monthly income means income before taxes and deductions.

Step-by-step calculation example

1. Add up your monthly debt payments. Include housing costs, car loans, student loans, credit card minimums, and any other recurring obligations.
2. Determine your gross monthly income. This is your income before taxes and deductions, as noted by the CFPB official definition.
3. Divide total debt by gross income. For example, if your monthly debts are $2,000 and your gross income is $6,000, you divide 2,000 by 6,000.
4. Multiply by 100 to get your DTI percentage. In this example, your DTI is 33%.

Here is a practical example using multiple debt types as outlined by Wells Fargo credit guide.

If your gross monthly income is $5,500, your DTI is ($1,900 / $5,500) x 100 = 34.5%.

What counts as monthly debt payments

Wells Fargo specifies that mortgage DTI calculations commonly include housing costs, credit card minimums, auto loans, student loans, and other monthly debt obligations. Bankrate adds that some lenders calculate DTI by including estimated mortgage principal, interest, taxes, and insurance rather than rent.

What this means: accuracy in listing all debt obligations is critical. Missing even one payment category can misrepresent your true DTI to an underwriter.

Is a 20% debt-to-income ratio bad?

No, a 20% DTI is excellent. It indicates strong financial health and low risk to lenders. Borrowers with a DTI of 20% often qualify for the best interest rates and most favorable loan terms.

What 20% DTI means for lenders

According to Chase mortgage guidelines, lenders view a DTI of 20% as very low risk. It signals that you have significant income left over after covering your debt obligations. Experian notes that mortgage lenders may look for a 28% or lower front-end DTI and a back-end ratio below 43%, though sometimes below 36%.

Advantages of a low DTI

A DTI of 20% puts you in a strong position to qualify for loans even if other factors—like a lower credit score—are not perfect. You are more likely to secure the advertised interest rates and may have more room in your budget for savings or investments.

For borrowers, a 20% DTI is a signal of financial strength, putting you in an excellent position to negotiate favorable loan terms.

How much debt is too much?

Most mortgage lenders consider a DTI above 43% to be too high for a standard qualified mortgage. Crossing this threshold closes the door to many conventional loan programs.

Lender thresholds for ‘too much’

The FDIC lending guidelines state that lenders usually require housing expenses plus long-term debt to be less than or equal to 33% to 36% of monthly gross income. Fannie Mae Selling Guide policy states that for manually underwritten loans, the maximum total DTI is 36% of stable monthly income, though it allows up to 45% if credit score and reserve requirements are met. DU (Desktop Underwriter) can allow up to 50%.

Signs your DTI is too high

If your DTI exceeds 43%, you will find limited mortgage options. Chase indicates that a DTI above 36% does not automatically disqualify you, but it often leads to higher interest rates and more scrutiny from underwriters. A DTI above 50% severely limits your borrowing options and signals financial distress.

A DTI over 43% significantly limits your borrowing power. Borrowers should aim for 36% or lower to keep their mortgage applications competitive.

What are common DTI mistakes?

Many borrowers make avoidable errors when calculating their DTI. These mistakes can mislead you about your financial readiness for a mortgage.

Forgetting to include all debt payments

Wells Fargo emphasizes that many people forget to include minimum credit card payments and monthly subscriptions. Every recurring debt counts toward your DTI, including child support and personal loans.

Using net income instead of gross income

A common mistake is using net income instead of gross income in the calculation. The CFPB official definition clearly states that DTI uses gross monthly income. Using net income makes your DTI appear higher than the lender’s calculation.

Overlooking future debt changes

Not accounting for potential income changes can misrepresent your true DTI. If you are planning to take on a car loan or new credit card, it will affect your DTI for mortgage qualification purposes. Bankrate suggests using a DTI calculator to test different scenarios before applying.

Borrowers who accurately calculate DTI using gross income and all debt obligations present the strongest application to lenders.

What to include in debt-to-income ratio?

Knowing what to include and exclude from your DTI calculation is essential for an accurate picture of your finances.

Debts to include

According to Wells Fargo, include mortgage or rent, car loans, student loans, credit card minimums, personal loans, and child support. Experian confirms that mortgage lenders look at both front-end DTI (housing costs only) and back-end DTI (all debts).

Debts to exclude

Most lenders exclude utilities, insurance premiums, groceries, cell phone bills, and taxes from DTI calculations. The FDIC lending guidelines focus only on housing expenses and long-term debt obligations.

Is rent included?

Yes, rent is included as a monthly debt payment for front-end DTI calculation. Bankrate notes that some lenders calculate DTI by including estimated mortgage principal, interest, taxes, and insurance rather than rent when the borrower is applying for a purchase loan.

For borrowers, a comprehensive DTI calculation that includes all relevant debts gives lenders an accurate view of your financial obligations.

How to lower your debt-to-income ratio

If your DTI is higher than the ideal 36% mark, you can take steps to improve it. Lowering your DTI strengthens your mortgage application and can lead to better interest rates.

1. Pay down revolving debt. Focusing on credit card balances reduces your minimum monthly payments and lowers your DTI.
2. Avoid new debt. Taking on a car loan or new credit card before applying for a mortgage will increase your DTI.
3. Increase your income. A raise, a second job, or side income boosts your gross monthly income and lowers your DTI ratio.
4. Consolidate debts. Rolling high-interest debts into a single lower payment can reduce your total monthly obligation.

Citizens Bank recommends aiming for a front-end mortgage ratio target of 28% or lower and a back-end ratio of 36% or lower. The FDIC lending guidelines confirm that lenders use these thresholds as standard benchmarks.

Frequently Asked Questions

For prospective homebuyers, the path to the best mortgage rates is clear: keep your DTI at or below 28% for housing costs and 36% for total debt. This positions you for the widest range of loan options and the most favorable terms from lenders.

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