What is a good debt-to-income ratio?

Your debt-to-income ratio (DTI) is your monthly debt payments divided by your gross monthly income. Lower is better: 36% or less including a new mortgage is a common target, and many mortgage lenders cap DTI somewhere between 36% and 50% depending on the loan.

The formula is simple

Add up all your monthly debt payments, then divide by your gross monthly income. Multiply by 100 to get a percentage. $2,000 in payments on $6,000 of income is a DTI of 33%.

What counts as debt

Mortgage or the new housing payment, car loans, student loans, personal loans, credit card minimums, leases, and alimony or child support you pay. Utilities, groceries, phone bills and insurance premiums usually don't count.

Limits depend on the lender and loan

Each lender and loan type sets its own DTI limit. For Fannie Mae mortgages, the cap is 36% on manually reviewed loans, up to 45% with strong credit and savings, and up to 50% through its automated system.

Lowering DTI takes two levers

You can lower your monthly debt payments, raise your gross income, or both. Paying off a debt or adding steady income moves the ratio the most.

How to calculate your DTI

Step 1: write down every monthly debt payment. Use the required payment on each loan and the minimum payment on each credit card. Add any child support or alimony you pay.

Step 2: find your gross monthly income. That is your pay before taxes and deductions. If you are paid a salary, divide your yearly salary by 12. If your income changes month to month, lenders usually average it over a longer stretch and ask for proof, like tax returns.

Step 3: divide the payments by the income and multiply by 100. $900 ÷ $4,500 = 0.20, so the DTI is 20%.

Front-end and back-end ratios

Mortgage lenders sometimes talk about two ratios. The front-end ratio counts only the housing payment. The back-end ratio counts the housing payment plus all your other debts. When people say DTI, they usually mean the back-end number.

The housing payment for a mortgage includes more than the loan itself. It adds property taxes, homeowners insurance, mortgage insurance if you have it, and HOA dues. Leaving those out makes your DTI look lower than what a lender will see.

What counts as a good DTI

There is no single cutoff. As a rough guide, under 20% leaves lots of room, 20% to 36% is a common comfort zone, and above that lenders often want strong credit and savings before they approve you.

For mortgages sold to Fannie Mae, the standard limit for manually reviewed loans is 36%, which can rise to 45% for borrowers who meet credit score and savings rules. Loans run through Fannie Mae's automated system can go up to 50%. Government-backed loans, like FHA and VA loans, follow their own rules, so ask your lender.

DTI is about your budget, too

A lender's limit is the most it will allow, not what is comfortable for you. A 45% DTI on gross income can mean more than half of your take-home pay goes to debt and housing, which leaves little room for savings or surprises.

Run the numbers on your take-home pay as well. If the new payment would squeeze your emergency fund and retirement saving to zero, a smaller loan is the safer choice even if you qualify for more.

How to lower your DTI

Pay off small debts entirely, starting with the ones that have the highest payment for their balance. A credit card with a $100 minimum and a $1,500 balance is a quick win.

Avoid new debt before you apply. Refinancing a loan to a lower payment can help, though a longer term usually costs more interest. On the income side, a raise, steady side income with a track record, or a co-borrower's income can all count, if the lender can verify it.