Importance of Debt-to-Income

At a very basic level, your debt to-income (DTI) ratio is simply your long term, semi-permanent debt compared to your current income. Usually, your mortgage lender will do this as a monthly comparison to make it easy, but the ratio’s the same whether you compare month to month or year to year. Your DTI ratio compares your monthly debt payments to your monthly gross income (before taxes or deductions). It’s a critical factor that lenders use to assess your ability to manage a mortgage alongside other debts. 

Why DTI Matters

A high DTI can limit your mortgage options or lead to higher interest rates, as lenders see you as riskier. Keeping your DTI low:

• Improves approval odds: Lenders favor DTIs below 36% for conventional loans or 43% for FHA.
• Lowers borrowing costs: A strong DTI may qualify you for better terms.
• Supports long-term stability: A manageable DTI ensures you can handle homeownership costs without stress.

What Counts in Your DTI?

Not all expenses are included in your DTI. Here’s what typically counts:

• Secured loans: Car loans, boat loans, or other loans tied to property.
• Unsecured loans: Credit card balances, personal loans, or lines of credit.
• Student loans: Federal or private loans you’re repaying.
• Co-signed debts: Loans you co-signed (e.g., for a family member), even if you’re not making payments.
• Other obligations: Alimony or child support.

Exclusions: Everyday bills like utilities, car insurance, cable, or subscriptions (unless delinquent and reported to credit agencies) don’t count, as they can be canceled without long-term commitment.

To see what’s reporting, check your credit report from a trusted source like MyFICO.com or AnnualCreditReport.com.

How to Improve Your DTI

If your DTI is high, take these steps before applying for a mortgage:

• Pay down debt: Focus on high-interest credit cards or smaller loans for quick wins.
• Refinance existing loans: Consolidate or refinance to lower monthly payments.
• Increase income: Add a side hustle or negotiate a raise to boost gross income.
• Avoid new debt: Skip big purchases (e.g., a car) until after your mortgage closes.
• Review co-signed loans: If possible, have the primary borrower refinance to remove your name.

Final Tip: Start Your Journey Prepared

Understanding your DTI is a crucial first step toward homeownership. Check your credit and address high debts to strengthen your mortgage application. If you need guidance to calculate your DTI, your Realtor can connect you with trusted mortgage professionals to simplify the process and set you up for success.

Ready to buy? Use your DTI knowledge to confidently move toward your dream home!