Your credit score gets you in the door, but your Debt-to-Income (DTI) ratio determines if you get the keys. Lenders use this percentage to measure your ability to manage monthly payments and repay the money you borrow.
The DTI Formula: How It's Calculated
Calculating your DTI is a simple piece of math, but many people include the wrong numbers. The formula lenders use is:
What Counts as "Debt"?
Lenders look at your minimum monthly payments, not your total balances. When calculating the "Debt" side of your ratio, include:
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Front-End vs. Back-End DTI
Mortgage lenders specifically look at two different versions of this ratio to ensure you aren't over-leveraged:
| Type | What it includes | Lender Limit |
|---|---|---|
| Front-End | Only your housing costs (PITI). | Ideally 28% |
| Back-End | Housing costs + ALL other debt. | Ideally 36% - 43% |
How to Improve Your DTI Fast
If your DTI is currently too high (above 43%), you have two levers you can pull to fix it before applying for a loan:
- ● Pay Down Small Balances: Since DTI is based on monthly payments, paying off a small credit card or personal loan with a $150/mo payment helps your DTI more than paying $2,000 toward a large mortgage balance.
- ● Add a Co-Borrower: Adding a spouse or partner with income (and low debt) increases the "Income" side of the formula, lowering the overall ratio.
Expert Strategy: Use the Debt Snowball method if your primary goal is to lower your DTI quickly, as it prioritizes eliminating monthly payments entirely.
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