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DEBT Debt-to-Income Ratio: What It Is, Why It Matters, an... 2026-02-27 · 4 min read ·

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

debt 2026-02-27 · 4 min read

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

When you apply for a mortgage or major loan, lenders scrutinize one number above almost all others: your debt-to-income ratio. Yet most people have never calculated theirs.

If your DTI is too high, you can be denied for a loan even with a good credit score. If it's healthy, it opens doors.

What Is Debt-to-Income Ratio?

Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward debt payments.

Formula:

DTI = (Monthly Debt Payments ÷ Gross Monthly Income) × 100

Example:

Note: DTI uses gross income (before taxes), not take-home pay.

What Counts as Debt Payments?

Include:

Don't include:

Front-End vs. Back-End DTI

Lenders often calculate two DTI figures:

Front-end DTI (housing ratio): Only your housing costs (mortgage/rent + property taxes + homeowners insurance + HOA fees) ÷ gross income.

Back-end DTI: All debt payments ÷ gross income. This is what most people mean by "DTI."

For conventional mortgages, guidelines typically target:

What's a Good Debt-to-Income Ratio?

DTI What Lenders Think
Below 20% Excellent — very low risk
20–35% Good — comfortable approval odds
36–43% Acceptable — conventional mortgage maximum
44–49% High risk — some lenders may still approve
50%+ Very high — most lenders won't approve; FHA has exceptions

The 36% rule: A common financial planning guideline is to keep total debt payments under 36% of gross income. Below that, you have breathing room; above it, debt starts crowding out other financial priorities.

Why Your DTI Matters Beyond Mortgages

Mortgage approvals: DTI is a primary qualification factor. Even with excellent credit, a DTI above 43–50% typically disqualifies you for conventional loans.

Interest rates: Higher DTI often means higher interest rates even if you're approved — lenders charge more for higher-risk borrowers.

Psychological bandwidth: Even apart from lender requirements, a high DTI means a large portion of your income is committed before you can make any discretionary choices. It compresses your financial flexibility.

Financial fragility: High DTI leaves little margin for income disruption. A job loss with a 50% DTI is devastating; the same event with a 20% DTI is manageable.

How to Calculate Your DTI Right Now

  1. List all monthly debt minimum payments
  2. Sum them
  3. Divide by your gross monthly income
  4. Multiply by 100

Keep a record of this number. It's a useful health metric to recalculate annually.

How to Improve Your DTI

There are only two ways to lower your DTI: reduce debt payments or increase income.

Reduce Debt Payments

Pay off high-balance revolving debt: Credit card minimum payments are often 2–3% of the balance. Paying down a $5,000 credit card balance eliminates the $100–150 monthly minimum payment, improving your DTI.

Target installment loans with small remaining balances: Paying off a car loan with 4 payments remaining eliminates that monthly payment entirely.

Refinance to lower monthly payments: Refinancing student loans, a car loan, or a mortgage to a lower rate or longer term reduces monthly payments (though often increases total interest paid — weigh the trade-off).

Avoid taking on new debt before a loan application: Every new monthly payment raises your DTI.

Increase Income

Ask for a raise or find higher-paying employment: A $500/month income increase with $1,800 in debt payments drops a 30% DTI to 26%.

Add part-time income: Even temporary income for 2–3 months before a loan application can improve qualification odds.

Wait until your income grows: Sometimes the most practical approach is simply waiting until income catches up with debt obligations.

DTI and the Mortgage Application Timeline

If you're planning to apply for a mortgage in 12–18 months:

  1. Calculate your current DTI now
  2. Determine your target (typically ≤ 36–43% back-end)
  3. Identify which debts to pay off to reach the target
  4. Build that payoff into your savings plan alongside your down payment

Some people find that paying off a car loan or private student loan — even at the cost of a slightly smaller down payment — makes mortgage qualification much easier.

The Bottom Line

Your DTI is a straightforward number with significant implications for your financial life. Calculate it, track it, and use it as a guide when making decisions about taking on or paying off debt.

A DTI under 36% gives you financial breathing room. A DTI under 20% gives you real freedom — the ability to weather income disruptions, qualify easily for loans when you need them, and direct more of your income toward building wealth.